A Guide to Investing in Mexico 2019 Brochure / report title goes here | Section title goes here 1.0 Investment climate 01 1.1 Business environment 01 1.2 Currency 02 1.3 Banking and financing 02 1.4 Foreign investment 02 1.5 Tax incentives 04 1.6 Exchange controls 09 2.0 Setting up a business 10 2.1 Principal forms of business entity 10 2.2 Regulation of business 12 2.3 Accounting, filing and auditing requirements 13 3.0 Business taxation 15 3.1 Overview 15 3.2 Residence 17 3.3 Taxable income and rates 17 3.4 Capital gains taxation 19 3.5 Double taxation relief 19 3.6 Anti-avoidance rules 20 3.7 Administration 24 3.8 Other taxes on business 25 4.0 Withholding taxes 28 4.1 Dividends 28 4.2 Interest 28 4.3 Royalties 28 4.4 Branch remittance tax 28 4.5 Wage tax / social security contributions 28 5.0 Indirect taxes 30 5.1 Value added tax 30 5.2 Capital tax 30 5.3 Real estate tax 30 5.4 Transfer tax 31 5.5 Stamp duty 31 5.6 Customs and excise duties 31 5.7 Environmental taxes 31 5.8 Other taxes 31 6.0 Taxes on individuals 32 6.1 Residence 32 6.2 Taxable income and rates 32 6.3 Inheritance and gift tax 33 6.4 Net wealth tax 33 6.5 Real property tax 33 6.6 Social security contributions 33 6.7 Other taxes 33 6.8 Compliance 33 7.0 Labor environment 34 7.1 Employee rights and remuneration 34 7.2 Wages and benefits 34 7.3 Termination of employment 35 7.4 Labor-management relations 35 7.5 Employment of foreigners 35 8.0 Deloitte International Tax Source 36 9.0 Contact us 37

II A Guide to Investing in Mexico 2019| Investment climate

1.0 Investment climate

1.1 Business environment

The United Mexican States or, as it is more OECD member countries conventionally called, “Mexico,” has a Australia Hungary Norway population of 119,938,473 million, covers a Austria Iceland Poland land area of 1,964,375 square kilometers (1,220,606 square miles) and has Spanish as Belgium Ireland Portugal its official language. Canada Israel Slovakia Chile Italy Slovenia Mexico is a federal republic formed by Czech Republic Japan Spain 32 states. The political system comprises federal, state and municipal governments. Denmark Korea (ROK) Sweden The government is divided into three Estonia Latvia* Switzerland branches: executive, legislative and judicial. Finland Luxembourg Turkey Each branch has specific competencies France Mexico United Kingdom granted by the constitution. The president leads the executive branch. The legislative Germany Netherlands United States branch has both federal and local legislative Greece New Zealand powers, with responsibility for issuing laws Enhanced engagement countries and regulations. The judicial branch is Brazil India South Africa formed by the Supreme Court of Justice, the Electoral Court and federal and local courts China Indonesia that are responsible for interpreting and OECD accession candidate countries enforcing Mexican law. Colombia Costa Rica Lithuania

Mexico’s economy is driven by foreign * Accession date February, 2018. trade. Export earnings are fueled by manufacturing, although oil, tourism, agriculture and mining also contribute to revenue.

The US is Mexico’s largest trading partner due to its geographical proximity and the benefits of the North American Free Trade Agreement (NAFTA). Despite increasing competition from China and India, many foreign companies still choose Mexico for assembly facilities and other operations. Other major export markets include Canada, Japan and Spain. Key countries from which Mexico imports goods include Germany, Japan and Korea.

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Mexico has 12 free trade agreements (FTAs) Customs clearance of goods is done Patents allowing the owner the exclusive with 46 countries and regions, 32 mutual electronically, which facilitates import and right to exploit an invention are granted for investment promotion and protection export operations. up to 20 years and are non-renewable. agreements with 33 countries, and nine economic complementation and partial Mexico has agreements with Korea (KOR) and scope agreements. The main benefit the US that allow the exchange of information 1.2 Currency granted under the commercial agreements related to customs transactions. US and is the application of preferential rates of Mexican customs officers also make joint The official currency in Mexico is the peso importing goods considered originating inspections of goods. (MXN). from the FTA member nations. Based on the framework of the exchange of Mexico is an active participant in multilateral customs valuation information agreements, 1.3 Banking and financing and regional forums, such as the Word Trade the Mexican and US governments have been Organization (WTO), the Asia-Pacific Economic working on establishing mechanisms for Many foreign multinational groups dominate Cooperation (APEC) and the Latin American mutual recognition for supply chain security Mexico’s financial system. Their affiliates Integration Association for the development of programs granted by both governments compete with independent financial firms Latin American Countries (ALADI). Mexico also to strengthen the trade and supply chain operating as public development banks, is a member of the Organization for Economic arrangements between the two countries. public credit institutions, private commercial Cooperation and Development (OECD). banks, private investment banks, savings and Economic activity is concentrated in Mexico loan associations, and mortgage banks. Other As a member of the WTO, Mexico has removed City. The six northern border Mexican components of the financial system include most of its export nontariff restrictions and states are home to much of the country’s securities market institutions, development regulations and has substantially reduced manufacturing, sities particularly maquiladoras trust funds, insurance companies, credit export taxes, as well as direct export producing goods that are exported. unions, factoring companies, mutual funds subsidies. Mexico has joined the Wassenaar and bonded warehouses. The banking sector Arrangement to implement export controls Price controls remains highly concentrated, with a handful for conventional weapons and their parts Mexico generally does not have price controls. of large banks controlling a significant market and components, dual use goods, software share, and the remainder comprised of and susceptible diverted technologies for the Intellectual property regional players and niche banks. manufacture and proliferation of conventional In accordance with the Federal Copyright and other weapons of destruction. Law, the National Copyright Institute Mexico City is the country’s main financial (INDA – an independent agency of the center, although Guadalajara and Monterrey Mexico has several export incentive programs Ministry of Education), is responsible for the (the country’s second and third ranked and special temporary import programs administrative enforcement of copyright cities, respectively) also are important to encourage export sales. The legislation legislation. INDA is authorized to conduct financial, industrial and commercial centers. promoting manufacturing facilities in investigations, request inspections, address Mexico (maquiladoras) makes the country copyright violations and impose sanctions. an attractive place to manufacture and 1.4 Foreign investment assamble goods for final export to the US The law grants an author “personal” and and other markets. Additionally, to encourage “property” rights; personal rights recognize the Mexico offers an attractive business and support national exports and promote author as the first and sole perpetual owner of environment, legal certainty, an extensive foreign investment in Mexico, the government the rights to his/her works and property rights free trade agreement network and a has also implemented the Decree that allow the author to “exploit the work exclusively developed economic sector. Foreign Establishes Sector Promotion Programs or authorize others to exploit the work”. investment has been simplified by (PROSEC), which provides preferential import Penalties apply for violation of the copyright law. legislative changes, a reduction in legal duty rate treatment for goods to be used and administrative bureaucracy and local by Mexican producers in a manufacturing The Industrial Property Law protects the content requirements, the elimination of process. Recent legislation also has created exclusive right to use trademarks throughout most import license requirements and special economic zones (SEZ) in Mexico that the registration period. Trademark protection an overhaul of the intellectual property will offer tax, customs duty and administrative covers the goods and services registered legislation. There are no general restrictions and regulatory benefits to companies setting under Nice Classification standards. Mexico or limitations on the remittance of up in the zones (see below under 1.5). also is part of the Paris Convention for the dividends or repatriation of capital. Protection of Industrial Property.

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The Foreign Investment Law (Ley de Inversión •• Foreign individuals or entities that A Mexican entity with foreign investment Extranjera or LIE) and regulations specify routinely perform commercial activities in and that agrees to a “Calvo Clause” may the rules for foreign investment activities Mexico; and acquire property located in the restricted in Mexico. Foreign investment is permitted zone for nonresidential purposes and •• Stock or equity participation trusts in all sectors except those specifically must notify the MFA of the acquisition holding real estate or other investments reserved for the Mexican government or within 60 days. The Calvo Clause broadly which grant rights in favor of foreigners. Mexican nationals or companies. In other states that a foreign purchaser agrees to cases, foreign investors may hold up to will be considered Mexican for purposes Mexican companies with foreign 100% of the capital stock of a Mexican of the purchase and waives any rights to participation must submit to the RNIE corporation or a 100% partnership share. have a dispute resolved by a court outside quarterly and annual reports reflecting any Investment in a classified or regulated Mexico. Failure to honor that commitment increase or decrease in the level of foreign sector, such as domestic port services, will lead to forfeiture of the interest or investment in the company’s capital and, shipping companies or railways must participation in the property. The LIE where the company performs restricted be approved by the Foreign Investment defines “nonresidential purposes” as time economic activities, demonstrating that Commission. share accommodation; activities relating the foreign interest does not exceed the to industrial, commercial or tourism; percentage specified by the LIE. The LIE specifies three areas in which and commercial activities (e.g. sales or foreign investors may not participate or transfers, urbanization, construction or the Foreign investment may occur via: where there is a ceiling on participation: development of real estate). •• Participation of foreign investors in the •• Activities that are performed exclusively capital stock of Mexican companies; Foreigners may acquire real estate outside by the Mexican state, including petroleum the restricted zone if they obtain the and hydrocarbons. (Notwithstanding •• Activities performed by Mexican relevant permit from the MFA. the provisions of the LIE, the Mexican companies with majority of foreign capital Constitution allows the Mexican state stock; and Real estate trusts to assign such activities to public •• Participation of foreign investors in the Trusts have become important investment corporations through entitlements and activities and actions contemplated by the vehicles for foreigners who seek to private Mexican companies by means LIE and its regulations. invest their capital in Mexico. Trusts are of public contracts, awarded after a regulated by, among others: the General competitive tender). Foreign ownership of Mexican real estate Law for Negotiable Instruments and Credit •• Activities that may be carried out only A Mexican entity with foreign investment Transactions, the LMV and the ITL. by the Mexican state and Mexican (foreign shareholders or partners) may acquire companies (e.g. domestic transportation Mexican real estate. However, if the property is To improve the attractiveness of the of passengers). located within the “restricted zone” (an area of Mexican real estate market for capital 100 km across the Mexican border and 50 km investors, the congress included in the •• Specific regulations on foreign investment across the Mexican beaches) and is acquired ITL special tax benefits for real estate specifying maximum participations in for residential purposes, the Mexican entity (as investment trusts (FIBRA). accordance with the LIE, e.g. national well as foreign individuals or corporations) may air transport (maximum 49% of foreign- not acquire the property directly. “Residential According to the ITL, for a trust to qualify as owned capital) and broadcasting purposes” means that the property will be lived a FIBRA and be entitled to the associated (maximum 49% foreign investment). A in by the owner or a third party. In such cases, tax benefits, it must meet the following foreign direct or indirect participation a Mexican trust must be created into which the requirements: greater than 49% must be authorized property is settled, with the Mexican entity, a by the National Foreign Investment •• Be executed according to Mexican laws foreign individual or a foreign entity appointed Commission). and with a Mexican trustee; as a beneficiary. The maximum duration of the trust is 50 years, although it may be renewed. •• Have as its main purpose the acquisition Under the LIE, the following entities must The trust also must obtain a permit from the or construction of real estate in Mexico be registered with the National Registry of Ministry of Foreign Affairs (MFA) to own the real that will be leased (including the right to Foreign Investment (Registro Nacional de estate in the restricted zone. It is possible that obtain income from the lease). The trust Inversion Extranjera or RNIE): the Mexican Congress may decide to remove agreement must specify the terms and •• Mexican companies with foreign this restriction on foreign investment in the conditions under which the investments participation; near future. in real estate will be carried out;

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•• The real estate must be constructed or The maquiladora regime has played acquired by the FIBRA with the intention an important role in enhancing the of being leased and must not be sold competitiveness and in facilitating within four years of the date on which modernization of the Mexican economy. The the construction or acquisition of the real FIBRA (real estate investment trust) regime estate was completed; has been maintained with some adjustments (see above under 1.4). Other incentives •• The trustee of the FIBRA must issue also apply to national cinematographic and certificates to represent the FIBRA that theatrical production, investments for high can be placed as public offerings on the performance sports, investments made in Mexican security market and registered electric vehicle power feeders as well as for with the RNV; or acquired by a group of investment in technology and R&D projects at least 10 unrelated persons; provided (CONACYT) and investment in energy and none of the individuals is a sole holder of infrastructure (FIBRA E). more than 20% of the total certificates issued; and A law that became effective on 2nd June •• The trustee of the FIBRA distributes to 2016 creates special economic zones (SEZ) the holders of the relevant certificates in Mexico that will offer tax, customs duty issued, at least once a year and no later and administrative and regulatory benefits than 15 March each year, at least 95% of to companies setting up in the zones. the total taxable profit accrued during the The SEZ law aims to stimulate growth, immediately preceding fiscal year. reduce poverty, facilitate the supply of basic services and attract investment to The trust must have a trust committee economically underdeveloped areas, mainly comprised at least 25% by independent in the southern states of the country. members of the relevant trust. Maquiladoras According to the LMV, rights of minority The maquiladora regime (or IMMEX) is shareholders of the certificates include: designed to promote exports and encourage maquiladora is that goods (materials, as well as foreign investment. •• Holders representing at least 20% of machinery and equipment) can be imported the certificates may oppose in court on a temporary basis and remain in Mexico for Maquiladoras are Mexican registered entities resolutions passed at certificate holders’ a limited period of time. The foreign principal that process, transform, assemble or repair meetings that they either did not attend company must be resident in a tax treaty imported materials, parts and components or at which they voted against such country. into finished goods that are subsequently resolution, within 15 days of the date the exported. Maquiladora companies typically resolution was adopted. It is important to consider that in order to are owned by a foreign corporation (often a apply the maquilas regimen it must comply •• Holders representing 15% of the certificates US company since many maquiladoras are among others, with may execute a civil liability action against the located near the US border) with whom the entity that manages the entrusted assets. maquiladora contracts to produce semi- 01. The total of its income for its productive finished or finished goods for shipment to the activity, must come exclusively from foreign company. To qualify to operate under maquila operations. 1.5 Tax incentives maquiladora status, a foreign investor must 02. Processes of transformation or repair, have a corporate presence in Mexico (which are carried out with machinery and Accelerated rates of depreciation are available may be up to 100% ownership of a Mexican equipment owned by the resident for investments made during the 2016 to corporation). The foreign parent provides abroad with which company with IMMEX 2018 fiscal years for taxpayers with revenues most of the machinery and equipment (M&E) (maquila) program have held maquila of at least MXN 100 million; for those that required for the maquiladora activities, as agreement, provided that they are not make investments in the construction or well as the raw materials or the parts to be owned by the company that performs expansion of transport infrastructure; and processed and/or assembled; these items the maquila operation or another those whose activities relate to the treatment, are imported by the maquiladora but remain Mexican resident company that is processing or transport of oil, natural gas and the property of the foreign company. One related party. petrochemicals. of the most relevant characteristics of a

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There are different types of maquiladora: Mexican PE: (i) adopt the safe harbor rules; or industrial (used for manufacturing), (ii) elect to negotiate and obtain an advance services, holding, outsourcing and shelter pricing agreement (APA) from the SAT via a maquiladoras. private letter ruling. Under the safe harbor rules, a maquiladora must report taxable Maquila operations generally create a PE income corresponding to the higher of: in Mexico for the foreign principal that •• 6.9% of the value of its assets (taking into provides the raw materials and M&E to account the value of all assets employed the maquila company; PE status would in the maquila operations, including expose the foreign principal to Mexican foreign-owned assets (both fixed assets income tax. However, as explained below, and raw materials/inventory)); and one of the benefits of the maquiladora regime is that PE status should not apply •• 6.5% of its costs and expenses (taking into if the maquiladora complies with certain account operating costs and expenses as requirements, in particular, special transfer computed under Mexican GAAP). pricing rules. Since October 2014, Maquiladoras are not Numerous changes have been made to allowd to sell or resell products within Mexican the maquiladora regime over the years. territory. Maquiladoras are permitted to Under the current regime, effective from obtain no more than 10% of the company’s January 2015, maquiladoras certified by the revenue from sources other than the provision Mexican tax authorities (SAT) have been of manufacturing or assembling services allowed to import basic raw materials, parts to a foreign principal. Some requisites are or components and M&E on a temporary applicable. basis, for as long as the maquila program is in force, without the payment of value FIBRA E added tax (VAT). VAT at 16% is initially FIBRA E aims to provide a stable vehicle for payable on temporary imports but the participants (i.e. investors, fund managers maquiladora is entitled to a corresponding and the trust itself) in large-scale energy 03. The process of transformation and repair credit for the full amount of the VAT caused and investment projects and enable them can be complemented with machinery and on importation, which must be reported to benefit from a favorable tax regime, equipment owned by a third party resident to the SAT. Maquiladoras that do not have including the following benefits: abroad, having a business relationship the necessary certification may purchase with the resident company manufacturing •• Operating companies are considered a bond issued by a financial institution abroad, which in turn has a maquila “pass-through” entities for tax purposes in order to be entitled to the VAT credit. agreement with one that performs the (tax is paid at the level of each investor) Maquiladoras also have been allowed a maquila operation in Mexico, provided and are exempt from making monthly suspension of the duties payable on the such goods are supplied derived of the provisional income tax payments; import of materials and M&E. commercial relationship, either owned by •• Dividends from operating companies to the company that performs the maquila In addition to the indirect tax benefits shareholders are not subject to certain or with machinery and equipment leased available to maquiladoras, there are income provisions in the Income Tax Law (ITL) to an unrelated party. Any machinery or tax benefits. These benefits include an and can be paid free of Mexican dividend equipment mentioned above may not be additional tax deduction equal to 47% of withholding tax; owned by another resident company in certain benefits provided to employees (e.g. Mexico that is related party of the company •• The sale of trust-issued securities placed contributions to pension and retirement that performs the maquila operation. by the FIBRA E on the Mexican stock funds, overtime payments, the exempt market may be tax exempt for individuals portion of profit sharing, Christmas The before mentioned shall apply and nonresidents; and bonuses, vacation premiums, food coupons, provided that the resident abroad with savings funds, etc.) and, as noted above, •• Formal obligations associated with having which has held the maquila agreement protection for the foreign principal company a permanent establishment (PE) in Mexico is the owner of at least a 30% of the from exposure to the creation of a PE in are eliminated for nonresidents, with machinery and equipment utilized in the Mexico. There are two methods by which a regard to their equity holding in the trust. maquila operation. maquiladora may prevent the creation of a

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The FIBRA E is suitable for all types of does not provide details on the income tax competitiveness of the SEZs. company (both private and those with incentives that will be available, but these state participation) involved with projects will be described in the declaration. Each of the SEZs will have a “Single that generate stable cash flows (such as Counter Service” to simplify and expedite transmission and distribution lines in the VAT benefits will be granted for goods the necessary procedures to construct, power industry). imported into the SEZs, as well as services develop, operate and manage the zones; performed in the zones: carry out productive economic activities; Special economic zones or establish and operate companies in the •• Goods imported into the SEZs and related As noted above, a new SEZ law has been “area of influence” (defined as the urban services performed by Mexican resident introduced. The executive branch of the and rural settlements adjacent to the SEZ companies will be subject to a 0% VAT government will issue a decree (declaration) that may receive economic, social and rate. to establish the SEZs and specify the technological benefits from the zone). incentives and benefits that will be available •• Imports of goods into the SEZs by in each zone. nonresidents (both entities and Tax incentives granted to taxpayers in individuals) will be exempt from VAT. northern border region SEZs will be designated geographic areas •• Goods removed from the SEZs to be sold in Mexico where qualifying investors may A presidential decree published in Mexico’s in the rest of the country will be subject to carry out activities such as manufacturing, government gazette on 31 December the standard VAT rate of 16%. agribusiness, processing, production and 2018 grants a temporary income tax storage of raw materials and inputs and •• Goods removed from the SEZs to be credit and reduced value added tax (VAT) scientific and technological innovation and exported will be exempt from VAT. rate to certain taxpayers located in 43 development; the provision of support municipalities in the northern border •• Activities performed in the SEZs will services for these activities, such as region. The decree applies for a two-year be exempt from VAT, and companies logistical, financial, computer, professional period from 1 January 2019 through 31 performing the services will not be and technical services and any other December 2020. services necessary to fulfill the objective considered VAT payers. of the law; and the import of goods for the above purposes. The executive branch will establish a customs regime to regulate imports SEZs may be established on privately- and exports of foreign, domestic and owned or state-owned real property. Where nationalized goods, and will establish a zone is sited on state-owned property, it facilities, requirements and controls for will be subject exclusively to the laws and imports and exports and the performance the jurisdiction of the federal authorities, to of activities in the SEZs. The regime will be reflect the public interest and the prioritized subject to the Customs Law and will seek to nature of the zones. promote the development, operation and functioning of such zones; for this purpose, The declaration establishing the zones international best practices and Mexico’s also will establish the incentives available domestic economic circumstances will be in the zones, including income tax, taken into account. Benefits may include value added tax (VAT) and customs duty expedited procedures to direct goods to the benefits. Such benefits will be temporary customs regime, deferral of customs duties (although they must be provided for at until goods are removed from an SEZ and a least eight years), and the amount of the measure allowing companies to opt for the tax relief or reductions will be granted on a lowest customs tariff available based on the progressively decreasing scale. duty applicable to the goods after they have undergone manufacturing, production or The income tax incentives will have to be repair processes in an SEZ. used to promote productive investment, generate employment and trained workers, Additional incentives will be established to to drive the creation of high value-added encourage the generation of capital and jobs and increase compensation for jobs, the development of socioeconomic workers employed in the zones. The law infrastructure and the productivity and

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The main features of the decree are of the taxpayer’s total income that is Requirements to claim the credit discussed below. derived in the northern border region for To claim the income tax credit, a taxpayer the fiscal year or taxable period. Income must: Definition of northern border region from the northern border region excludes •• Request authorization from the SAT to The northern border region for purposes income derived from intangible goods or enroll in the “registry of beneficiaries of of the decree includes the following digital commerce, which does not qualify for the northern border region tax incentive” municipalities: the tax benefits under the decree. and enroll in the registry; •• Ensenada, Playas de Rosarito, Tijuana, Qualifying taxpayers include individuals •• Certify that their tax domicile has been Tecate and Mexicali in the state of Baja that engage in business activities, Mexican located in the northern border region California Norte; entities, nonresidents with a permanent for at least 18 months before the date of •• San Luis Río Colorado, Puerto Peñasco, establishment (PE) in Mexico and those registration; and General Plutarco Elías Calles, Caborca, exercising the income accrual option •• Not benefit from other tax incentives Altar, Sáric, Nogales, Santa Cruz, Cananea, established for companies incorporated by in Mexico as from the date the decree Naco and Agua Prieta in the state of individual shareholders. entered into force. Sonora; The following example illustrates the •• Janos, Ascensión, Juárez, Praxedis G. calculation of the income tax credit: Guerrero, Guadalupe, Coyame del Sotol, Ojinaga and Manuel Benavides in the Income from Percentage of state of Chihuahua; Total income and northern border income obtained 2019 tax calculation •• Ocampo, Acuña, Zaragoza, Jiménez, region in border region Piedras Negras, Nava, Guerrero and Hidalgo in the state of Coahuila de Income 1,000 950 95% Zaragoza; Deductions 900 •• Anáhuac in the state of Nuevo León; and

•• Nuevo Laredo, Guerrero, Mier, Miguel Tax losses 0 Alemán, Camargo, Gustavo Díaz Ordaz, Reynosa, Río Bravo, Valle Hermoso and Tax incurred 30 (one third: 10) Matamoros in the state of Tamaulipas. Tax credit 9.5 (95% of 10) Income tax credit The decree allows certain taxpayers that Tax payable 20.5 derive income “exclusively” in the northern border region to claim a tax credit of up to one-third of their income tax liability against In this example, the income obtained in The authorization request must be the tax reported in the annual tax return or the border region represents 95% of the submitted to the SAT no later than 31 March in the estimated tax returns. taxpayer’s total income, and the taxpayer’s of the fiscal year for which the tax credit is effective income tax rate is 20.5%. If the claimed. The SAT must issue a ruling on the A taxpayer will be deemed to derive income total income obtained in the border region request no later than the month following exclusively in the northern border region represents 100% of the taxpayer’s total that in which the request was filed. where the income represents at least 90% income, the tax payable would be 20 (tax of the taxpayer’s total income during the incurred of 30 less a credit of 10) and the Taxpayers that commence operations in a immediately preceding fiscal year, according effective income tax rate would be 20%. qualifying municipality after 1 January 2019 to the Omnibus Tax Bill issued by the Tax must request authorization from the SAT Administration Service (SAT) on 7 January For individuals who pay tax at the maximum during the month following the date of their 2019 for this purpose, which applies as from 35% rate and derive all of their income registration with the Federal Taxpayers 1 January 2019. in the border region, one-third of the Registry (RFC) or the filing of a notice tax (11.67%) is creditable, resulting in an regarding the incorporation of a branch Taxpayers are required to prorate the effective income tax rate of 23.3%. or establishment in the northern border income tax credit based on the percentage region.

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Once granted, the SAT authorization will estimate that their border region income •• Taxpayers operating under (i) the optional remain in effect during the fiscal year in will represent at least 90% of their total tax grouping integration regime; (ii) the which it was issued. Taxpayers wishing to income for the year. regime for entities handling fixed assets remain in the registry for the next fiscal directly related to the transport of cargo year must renew their authorization by New fixed assets are defined as those and passengers; (iii) the regime for filing a renewal application with the SAT that are used for the first time in Mexico. agricultural, livestock, forestry and fishery no later than the date on which the annual Taxpayers also may utilize fixed assets that activities; or (iv) the tax incorporation tax return is filed for the year immediately already have been used in Mexico provided regime; preceding the year for which the renewal is the assets are not acquired from a related •• Individuals resident in Mexico whose requested. party, according to the Omnibus Tax Bill income is derived from the provision of issued by the SAT on 7 January 2019. independent professional services; To enroll with the registry, a taxpayer also must fulfill the following requirements: Taxpayers that have their fiscal domicile •• Taxpayers engaged in the performance of within the northern border region but have “maquila” operations; •• Have an advanced electronic signature, a branch, agency or other establishment along with a positive opinion regarding •• Taxpayers that perform activities through outside the region, and taxpayers that compliance with its tax obligations under trusts engaged in the acquisition or have their fiscal domicile outside the the Federal Tax Code (FTC); construction of real property for leasing region but have a branch agency or other purposes; •• Have access to the tax mailbox through establishment within the region, may apply the SAT website; and the tax benefits granted by the decree •• Production cooperatives; provided they certify that the fiscal domicile •• Collaborate on a semi-annual basis with •• Taxpayers whose name and federal or other establishment has been located in the SAT by participating in the real-time taxpayer registration number are listed on the region for at least 18 months at the date verification program. the SAT website (among others) because they enroll with the registry. In such cases, they have outstanding tax liabilities, the applicable tax benefit will be based on Taxpayers that begin activities in the cannot be located, have an unfavorable the percentage of income derived within the northern border region may request judgment relating to a tax crime or have border region. registration in the registry before meeting had a tax payment forgiven; the 18-month requirement, provided Excluded taxpayers •• Taxpayers that have issued false they have the economic capacity, assets The following taxpayers do not qualify for electronic invoices for nonexistent and facilities necessary to carry out their the income tax credit: transactions or that have a partner or operations and business activities in the stockholder that has done so. Taxpayers region. In such cases, taxpayers must •• Credit, insurance and bonding institutions, that have entered into transactions with certify that they use “new” fixed assets to public bonded warehouses, financial such taxpayers and have not provided perform their border region activities and leasing companies and credit unions; proof to the SAT that they effectively

08 A Guide to Investing in Mexico 2019 | Investment climate

acquired the goods or received the the 16% standard VAT rate, thus allowing that have entered into transactions with services covered by the electronic these activities to be taxed at a rate of 8%. such taxpayers and have not provided invoices also will not be allowed to apply proof to the SAT that they effectively the credit. Requirements for reduced VAT rate acquired the goods or received the Taxpayers that apply the reduced VAT rate services covered by the relevant •• Taxpayers found to have transferred must fulfill the following requirements, electronic invoices also will not be allowed unlawful tax losses, as evidenced by their as well as the requirements under the to apply the credit; and inclusion in the list published in the official Omnibus Tax Bill issued by the SAT on 7 gazette and on the SAT website; •• Taxpayers found to have transferred January 2019: unlawful tax losses as evidenced by their •• Taxpayers that perform business activities •• Physically deliver the goods or provide the inclusion on the list published in the through trusts; services in the northern border region; official gazette and on the SAT website. •• Taxpayers that supply personnel through and labor subcontracting schemes or are Nontaxable income •• File a notice regarding the application of considered intermediaries according to The tax benefits established by the decree the tax benefit within 30 calendar days the federal labor law; will not be considered taxable income for of enactment of the decree, i.e. by 31 income tax purposes. •• Taxpayers that have been subject to January 2019. an inspection by the tax authorities for Transition rules any of the five fiscal years preceding Taxpayers that commence activities after the enactment of the decree, where the 1 January 2019 must file the notice with •• Taxpayers that are entitled to the income inspection determined unpaid taxes that their RFC (taxpayer identification number) tax credit with respect to income from have yet to be settled; registration application, which must be filed activities carried out in the northern according to the Regulations of the FTC. border region but that receive the income •• Taxpayers that apply other tax advantages after the date the decree expires may or incentives, including exemptions or Taxpayers may apply the reduced rate apply the income tax credit with respect subsidies; only if they file the required notice on time to the income provided it is received •• Taxpayers that have commenced and in the correct form. Failure to file the within 10 calendar days following the date the liquidation process at the time notice will result in consequences detailed on which the decree expires. authorization is request to apply the tax in applicable tax provisions, including •• For the purposes of the VAT credit, when benefit; disallowance of the reduced rate and the sale of goods, provision of services possible penalty surcharges. •• Entities, the partners or stockholders or granting of the temporary use or of which have individually lost their enjoyment of goods took place before the The reduced rate VAT rate does not apply authorization to apply the tax benefit decree expires, the tax benefit will apply to: granted by the decree; and provided the relevant payments are made •• The sale of real property and intangible within 10 calendar days following the date •• State production companies and their assets; on which the decree expires. subsidiaries, as well as contractors under the Hydrocarbons Law. •• The supply of digital content, such as audio or video, or a combination thereof, 1.6 Exchange controls Refund requests and offsetting through the downloading or temporary The income tax credit is not refundable and receipt of electronic files, among others; There are no restrictions on the import or may not be used to offset other types of •• Taxpayers whose name and federal export of capital. Repatriation payments taxes. taxpayer registration number are listed can be made in any currency. Both on the SAT website, because they have residents and nonresidents can hold bank Reduced VAT rate outstanding tax liabilities, cannot be accounts in any currency anywhere in the The decree also establishes a reduced VAT located, have an unfavorable judgment world; however, for some foreign currency rate for qualifying taxpayers that engage in relating to a tax crime or have had a tax accounts located in Mexico, the currency activities relating to the sale of goods, the payment forgiven; must be the US dollar and these accounts provision of independent services or the may be held only by companies and not granting of the temporary use or enjoyment •• Taxpayers that have issued false individuals. of goods in premises or establishments electronic invoices for nonexistent located in the northern border region. Such transactions or that have a partner or taxpayers are granted a 50% reduction in stockholder that has done so. Taxpayers

09 A Guide to Investing in Mexico 2019 | Setting up a business

2.0 Setting up a business

2.1 Principal forms of authorities)—are required to carry out public The information required to incorporate certification of legal acts. The officers must be either an SA or an SRL (or an investment business entity lawyers that are granted “public faith” status protection corporation, Sociedad Anónima by the government to perform this function. Promotota de Inversión – SAPI) is almost The most common means of investment for Generally, the role of such certifying officers is identical, as follows: foreign corporations or individuals wishing to to formalize the consent of the shareholders •• There must be at least three alternative do business in Mexico is the incorporation of or partners of the company and, therefore, names for the new company, which must a Mexican company, in which foreigners may the shareholders or partners (or their be provided to the MOE to obtain a permit own and participate in the capital stock. representatives) must appear before the for the incorporation of the company. officers to execute the relevant incorporation The legal provisions governing the documents. •• The names of the persons who will be incorporation of companies apply at a shareholders or partners of the company federal level, so that regardless of the place The process to incorporate a company is as (at least two are required and may be of incorporation within Mexico, companies follows: individuals or entities) must be provided. are regulated by: (i) the Mexican Law The shareholders or partners may grant a •• Obtain from the Ministry of Economy Governing Commercial Companies (Ley special power of attorney to the persons (MOE) a permit to use the corporate name General de Sociedades Mercantiles or LGSM) that will appear before the Mexican certifying of the company. and (ii) the Securities Market Law (Ley del officer to incorporate the company on their Mercado de Valores or LMV). •• Draft the bylaws of the company, based behalf. Any powers of attorney also must on the provisions of the LGSM or LMV be valid and enforceable in accordance with The LGSM provides for seven different types and/or any shareholders’ agreement or Mexican law and if granted abroad, must be of commercial company. The ITL grants the other kind of agreement when different granted before a notary and comply with same tax treatment to all types, although groups of shareholders or partners will be international treaties signed by Mexico, such two types of company are the most common equity holders of the company. as the Inter-American Convention on the choice for foreign investors doing business Legal Regime of Powers of Attorney to be •• Execute the incorporation deed in Mexico: used Abroad, the Washington Protocol on containing the company’s bylaws before a the Uniformity of Powers of Attorney and •• The variable capital limited liability stock public faith officer (including any powers the Hague Apostille Convention. The power corporation (sociedad anónima de capital of attorney granted to officers of the of attorney also must be translated into variable or SA); and relevant company). Spanish by an expert translator appointed by •• The non-stock variable capital limited liability •• File with the Public Registry of Commerce the relevant court. corporation (sociedad de responsabilidad of the company’s domicile the public deed •• The amount of the capital stock of the limitada de capital variable or SRL). containing the articles of incorporation of Mexican company and each shareholder the company (and powers of attorney, if or partner’s participation in that stock. Formalities for setting up a company appropriate). Mexico’s legal system is based on civil, •• The name of each member of the •• Obtain a tax identification number from rather than common, law and as a result, board of directors or the name of the the SAT, which will allow the company the incorporation process varies from sole administrator of the company, as to open bank accounts and pay taxes that followed in common law countries. appropriate, together with the names of electronically. Incorporation takes two to five business days the company’s examiner and main officers. once all the required documentation has •• File and register with other Mexican •• The names of the persons that will receive been completed and submitted. authorities (e.g. the Foreign Investment powers of attorney from the company and Registry). Renewal filings and the limitations on those powers (generally In accordance with Mexico’s civil legal system, periodic provision of information to such such persons would be carrying out the state appointed officers—either Notarios authorities also will be required during the day-to-day management of such company). Públicos (appointed by local governments) lifetime of the company. or Corredores Públicos (appointed by federal

10 A Guide to Investing in Mexico 2019 | Setting up a business

•• The rules regarding the dissolution and Board of directors: Shareholders •• Did not obtain a taxpayer´s identification liquidation of the company. representing 25% of the voting rights have number; the right to appoint a member to the board •• Changes its address while being subject Forms of entity of directors. An SA may have a sole director. to a tax audit by the relevant authorities; There are no restrictions on the nationality Requirements for an SA or country of residence of the director(s). •• Did not correctly record its earnings, or The SA has been widely used in Mexico as destroyed or modified accountability an investment vehicle. Management: The management of a SA is documents of the company; or undertaken by one or more directors who •• Ceases or postpones its activities without Capital: The capital stock is divided into need not be shareholders of the company giving prior notice to the SAT. shares. There is no maximum or minimum but are appointed by the shareholders. required share capital. The shares are Shareholders, directors and subsidiaries considered to be negotiable credit instruments Taxes and fees: No capital duty or other of the company also will be liable for fraud that can be used in exchange operations, such fees are payable on incorporation. against third parties carried out by the as endorsements. The minimum capital stock company. agreed by the shareholders must be fully paid- Types of share: A SA may issue shares with up on incorporation. no par value. Nonvoting and preference Directors and officers of the SA are shares also are permitted. required to keep confidential all company The general rule is that stock is freely information provided to them to fulfill the transferrable but it is common for an SA to Control: Shareholders representing 25% of requirements of their positions, unless the specify restrictions in its bylaws to limit the the voting rights may execute a civil liability information is requested by a competent transferability of shares. Shareholders may action against the directors for the benefit Mexican authority. The confidentiality elect to include restrictions on: the transfer of the corporation in accordance with the obligation remains in force for at least one of shares, exclusion clauses for shareholders, terms of the LGSM. year after the individual’s office has ceased. the exercise of retirement or separation rights, or the right to redeem shares. They Ongoing maintenance: In accordance also can establish the relevant price at which with the provisions of the LGSM, an SA is transfers must take place or the method to required, amongst other obligations, to: be used to determine that price. •• Execute a shareholders meeting at the corporate domicile of the corporation Similar to a SAPI, an SA may convert from at least once a year at which the an ordinary private corporation to a publicly shareholders: (i) approve the annual held company listed on the Mexican stock financial statements and profits of the exchange, by including the relevant provisions company, and (ii) ratify the board of in its bylaws of the SA. Amongst the provisions directors and the report presented by the of the LGSM are clear and transparent exit examiner; mechanisms for minority shareholders who do not wish to retain their shareholdings. In all •• Maintain corporate ledgers recording cases, if an SA intends to make public offerings, shareholders’ names, nationalities, capital it will need to be regulated according to the stock variations and transfers of capital provisions of the LMV. stock; and

•• Appoint a sole director or board of Founders, shareholders: The SA may directors to carry out the instructions have an unlimited number of shareholders provided by the shareholders’ meetings but there always must be at least two and to direct the activities performed by founders/shareholders, which may be the company. individuals or corporate entities. Each shareholder’s participation is recorded Liability: In addition to the full payment in the company’s stock ledger book. Each of their capital contributions, the shareholder’s liability is limited to the full shareholders, directors and even officers of payment of its capital contributions. the SA will be jointly and severally liable for tax purposes when the company:

11 A Guide to Investing in Mexico 2019 | Setting up a business

Requirements for an SRL An SRL structure may not be used for an office can be held responsible for the The SRL is another common form used by initial public offering through the Mexican liabilities of a branch. foreign investors. stock exchange. A branch of a foreign corporation formally Capital: The SRL’s capital is divided into Founders, shareholders: A SRL must have registered to do business in Mexico, as well participation units instead of shares; therefore, a minimum of two partners and a maximum as any other PE for income tax purposes, evidence of participation as a partner is not of 50. generally is taxed the same as a Mexican provided via a stock certificate but instead corporation. in an equity participation recorded in the Board of directors: Shareholders special partners’ ledger of the company (no representing 25% of the voting rights physical title exists). A participation unit may have the right to appoint a member to the 2.2 Regulation of business be transferred only with the approval of the board of directors. An SRL may have a sole other partners. Each partner may own only director. There are no restrictions on the Registration and filing requirements one equity participation and each equity nationality or country of residence of the The LGSM requires that all transactions, participation can have a different value. The director(s). such as the incorporation, merger, minimum capital stock agreed by the partners dissolution and liquidation of a corporation must be fully paid-up on incorporation. Management: The management of a SRL and the necessary public notifications, is undertaken by one or more directors who are recorded via the electronic system A capital increase requires the approval of need not be partners of the company. overseen by the Ministry of Economy. the other partners and the acceptance of a new partner requires a special quorum. As Taxes and fees: No capital duty or other The LMV regulates three different types of a general rule, the special quorum requires fees are payable on incorporation. stock exchange company: a majority vote by the holders of the equity •• The investment promotion corporation participations, unless a higher quorum is Types of share: As stated above, (Sociedad Anónima Promotora de Inversión established in the bylaws of the SRL. each partner may own only one equity or SAPI); participation and each equity participation can have a different value. Equity •• The publicly trading stock company participations with no par value are not (Sociedad Anónima Promotora de Inversón permitted. The amount of each partner’s Bursatil or SAPIB); and participation is evidenced in the equity •• The publicly traded stock company participation ledger book. (Sociedad Anónima Bursátil or SAB).

Liability: Each partner is liable only for According to the LMV, the SAPI is not the full payment of its individual capital subject to the supervision of the National contribution. Banking and Securities Commission (Comision Nacional Bancaria y de Valores or Branch of a foreign corporation CNBV), which is the commission in charge A foreign company can set up a branch in of supervising the public offering of stock Mexico, but it must obtain approval from in the Mexican security market, except the Ministry of the Economy to set up a when its capital stock or the securities that branch office in Mexico. represent its capital stock are intended to be publicly traded and registered in the Although a few companies have established National Securities and Intermediaries branches in Mexico, they are at a Registry (Registro Nacional de Valores or disadvantage for several reasons. Branches RNV). SAPIBs and SABs should request that may not own real estate and they may not the securities that represent their capital deduct payments to the head office for stock are registered in the RNV. The LMV interest, royalties, fees or other services. has a strict policy stating that all securities Establishing a branch takes longer and placed on the Mexican Securities Market is more expensive than establishing a first must be registered in the RNV and corporation, and branch charters usually approved by the CNBV. contain more restrictions than corporate charters. As branch offices are not legally separate from the head office, the head 12 A Guide to Investing in Mexico 2019 | Setting up a business

These types of company were created Mergers, spinoffs and acquisitions are Although the law technically prohibits by Mexican legislators to encourage the taxed as transfers of property. Mergers monopolies per se, in practice, focus is participation of Mexican companies in the and spinoffs will not be taxed if they meet placed on the abuse of monopoly power. Mexican securities market, as well as special certain requirements, such as: The president of the Federal Competition regulations to maintain a controlled public Commission and other officials have made •• Notification to the tax authorities; offering of issued stock. In accordance with it clear that the law will be applied only the LMV, such companies follow the same •• Filing a tax return for the last fiscal year, as against companies that engage in prohibited incorporation process established in the well as any required information statements practices, not against those that merely have LGSM for an SA. through the surviving company in the case the potential to exercise monopolistic powers. of a merger, or through the designated Companies regulated under the LGSM and company in the case of a spin-off where a Anti-money laundering legislation the SAPI are subject to a number of ongoing company does not survive; Recently-introduced anti-money laundering regulatory requirements in accordance with legislation (Federal Law for the Prevention •• In a merger, the surviving company should the LMV, including to: and Identification of Transactions with continue during the year after the merger to Illegal Resources, Ley Federal para la •• Convene a shareholders’/partners’ engage in the same activities in which it and Prevencion e Identificación de Operaciones con meeting at the corporate domicile of the the merged companies engaged before the Recursos Ilicitios or ALML) imposes additional company at least once a year at which merger (with some exceptions); and burdens on Mexican companies. the shareholders/partners will approve •• If a merger is going to take place within the annual financial statement of the five years of a previous merger or spin-off, The main purpose of the ALML is to protect company and profits, ratify the board of authorization must be obtained from the the financial system and the national economy directors and, in the case of the SA and tax authorities. from transactions carried out in Mexico with the SAPI, ratify the report presented by illegal resources. It creates obligations for the examiner. Monopolies and restraint of trade entities and/or individuals that carry out what •• Maintain corporate ledgers recording the The Federal Competition Commission is the law describes as “vulnerable activities.” names and nationalities of the holders responsible for enforcing the Competition Law. Companies and/or individuals performing such of capital stock, together with variations The Commission has broad investigative and activities must submit a report in a prescribed in the holdings and stock transfers. In enforcement powers to address monopolies format with the SAT. accordance with the LGSM, the names of and restraints of trade. the shareholders/partners that appear “Vulnerable activities” are defined to include: (i) in such records are, with respect to third Mexico’s antitrust law prohibits monopolies real estate development or rentals; (ii) gambling; parties, the legal holders of the shares/ and certain horizontal restrictive practices and (iii) the provision of professional advice and/ equity participation. deemed to be “absolute monopolistic practices.” or services, as an independent party, without Price fixing, restrictions on production and an employment relationship with the client •• Appoint a sole manager or board of distribution, market sharing and concerted when advising on corporate matters such as the directors to carry out the instructions of bidding in public tenders are prohibited. incorporation process of a company; mergers; the shareholders’/partners’ meetings and acquisitions; and capital increases. to direct the activities performed by the The law also prohibits the following practices company. (among others) by firms that have substantial power in the marketplace and that restrain 2.3 Accounting, filing and Mergers and acquisitions or intend to restrain competition: vertical Large mergers and acquisitions must auditing requirements market sharing; restrictions on resales; be authorized in advance by the Federal tie-ins; exclusivity contracts; refusals to deal; Competition Commission. Failure to obtain For corporate purposes, companies are and boycotts. Substantial market power is authorization can result in the imposition obliged to maintain a shareholders' minutes subject to a case-by-case investigation based of penalties, suspension of the merger or book of meetings held, regardless of whether on factors such as: the market participation acquisition, or the denial of the merger or the meetings are ordinary, extraordinary of the economic agent and whether it has acquisition. Before a merger or acquisition, or special. Companies must maintain a the unilateral power to fix prices; presence it is necessary to verify the type of entity shareholder registry in which the company of barriers to market access; existence and that will be involved to ensure compliance officially recognizes the shareholders and market power of competitors; access of with the relevant legal and tax regulations. records the company’s shares, as well as a the economic agent and its competitors to registry of its capital (both increases and inputs and other raw materials; and recent decreases) and share purchases. market performance.

13 A Guide to Investing in Mexico 2019 | Setting up a business

Accounting standards are set by regulatory bodies, such as the Mexican Council of Investigation and the Development of Financial Information Standards. Mexican companies are required to prepare their financial statements in Spanish and according to Mexican Financial Information Standards (NIF, formerly Generally Accepted Accounting Principles or PCGA). Accounting registries and books of account must be recorded in Spanish.

Corporations with gross income exceeding MXN 109 million, assets exceeding MXN 86 million or with at least 300 employees (in every month during the tax year) may file with the tax authorities a special report (dictamen fiscal) prepared by an independent public accountant. If the report is filed, the tax authorities will not audit on general principles, but instead review to verify that the audit was properly carried out.

14 A Guide to Investing in Mexico 2019 | Business taxation

3.0 Business taxation

3.1 Over view Mexico Quick Facts for Companies

Corporate income tax rate 30% The principal taxes affecting companies doing business in Mexico are the federal Branch tax rate 30% corporate income tax, withholding taxes, Capital gains tax rate 30% VAT, tax on real property and social security contributions that must be made on behalf Basis Worldwide income of employees. Some taxes are levied at the Participation exemption No state and municipal levels. Loss relief

Under mandatory profit sharing rules, - Carryforward 10 years employers are required to distribute and - Carryback No pay 10% of their “adjusted” taxable income Double taxation relief Yes, credit system to employees. The actual distribution of profits must be paid within 60 days after Tax consolidation No, but there is a tax integration regime the corporate income tax return has been Transfer pricing rules Yes submitted (and no later than 31 May of the following year). Thin capitalization rules Yes Controlled foreign company rules Yes As noted above under 1.5, incentives are available for maquiladoras. Tax year Calendar year Advance payment of tax 12 installments Mexico has transfer pricing, thin capitalization and controlled foreign company rules, as well Return due date 31 March as a general anti-avoidance rule. Withholding tax

- Dividends 10% The Congress approves a federal revenue - Interest 4.9%/10%/15%/21%/35%/40% law on an annual basis, which generally - Royalties 25%/35%/40% includes a list of the federal taxes to be - Branch remittance tax 10% imposed during the year. The Ministry of Capital tax No Finance is authorized to issue regulations to implement the tax law. The SAT is the body Net wealth tax No charged with collecting tax and enforcing Payroll tax State level compliance. Social security contributions (approximate) 30%

Real estate tax State/municipal level

Real estate transfer tax 2%-5%

Environmental tax Varies

VAT (standard rate) 16% (standard rate) / 0% (export rate)

15 A Guide to Investing in Mexico 2019 | Business taxation

Constitutional challenge against the cancellation of the universal offsetting process On December 28th, 2018, the Decree to issue the Federal Revenues Law for 2019 was published in the Federal Official Gazette. In said law, Section VI of Article 25 eliminated the possibility of offsetting taxes of a different nature, by stating that, in lieu of Article 23 of the Federal Fiscal Code, taxpayers who are obligated to file tax returns may only offset favorable balances against due taxes when the former and the latter share the same nature.

In addition, this provision states that, regarding value added tax, when a favorable balance is derived in the applicable tax return, said balance will only be liable to be offset against value added tax due in the following months, thus effectively eliminating the possibility of offseting this favorable balance against other federal taxes.

This provision (Article 25, Section VI of the Federal Revenues Law for 2019) is considered to be in breach of a taxpayer´s constitutional rights as provided for by the Mexican Constitution. This creates the opportunity to challenge said provision via an Amparo (Constitutional Challenge), in order to reinstate the right to offset any federal tax favorable balance against any federal tax due (universal offsetting process).

The Constitutional Challenge must have beensubmitted before a District Judge by February 14th, 2019 at the latest.

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3.2 Residence

A company is resident in Mexico if its place of effective management is located in Mexico.

3.3 Taxable income and rates

Residents are taxed on their worldwide income. Nonresident companies are taxed only on their Mexican-source income. Income is deemed to derive from Mexican sources when the assets or activities are in Mexico or when the sales or contracts are carried out in the country, regardless of where title passes.

The corporate tax rate is 30%. The same the level of the distributing entity (and may supported by relevant invoices. Examples of rate applies to Mexican branches of foreign reach 42.86% due to gross-up). The tax, allowable deductions include: companies. however, may be carried forward for up to •• Returns received, or discounts or rebates two years. granted during the tax year; Taxable income defined The gross income of a resident legal entity As from 1 January 2016, Mexican companies •• Cost of goods sold; includes all income received in cash, in kind, with investments in renewable sources •• Expenses net of discounts, rebates or returns; in services or in credit, including income of energy may write-off the cost of those derived from abroad. This includes all profits investments in one year and create a •• Investments (depreciation under the from operations; passive income, such as special net profit account (the “CUFIER”). If straight line method, adjusted for inflation); interest, royalties and rents; and capital dividends are paid from this account, the •• Bad debt credits and losses arising from gains. The taxable income of a company is payer will not be required to pay additional natural disasters and other acts of God; its gross income in a tax year less allowable corporate tax. If dividends are not paid expenses and losses. Revenue and expenses from the CUFIER account, the distribution is •• Contributions to employee pension or are recognized on an accruals basis. subject to the 30% income tax at the level of retirement funds (with some limitations); the distributing entity, as described above. and The taxation of dividends paid by resident •• Accrued interest, subject to the thin entities to resident shareholders depends Payments received in the form of royalties for capitalization rules. on whether the profits out of which the the use of patents, trademarks, trade names dividends are paid have been subject to tax and service fees are taxable in Mexico. An employer can deduct a certain percentage at the corporate level. If the profits already of specified benefits provided to employees have been taxed, the shareholder is entitled Corporate capital gains or losses arising from (e.g. contributions to pension and retirement to credit for the underlying corporate the sale of fixed assets are treated as ordinary funds, overtime payments, the exempt portion income tax paid. Dividends received by a income or losses, taxable at the normal of profit sharing, Christmas bonuses, vacation Mexican resident corporate entity from corporate rate. In calculating the taxable gains premiums, food coupons and savings funds, another Mexican resident corporate entity arising from the sale of land, buildings, equity among other benefits), provided certain are exempt from corporate income tax. shares and other capital interests, companies conditions are satisfied. Employee profit may apply an official schedule of inflation sharing paid during the year may be credited The Mexican payer company must keep a adjustments to the acquisition cost of the asset. against taxable gains for income tax purposes. record of the profits that have been taxed in a special account, known as the “CUFIN” Deductions Dividends are not deductible by the distributing account. If dividends are distributed from a Business expenses are deductible if they corporation or included in the gross income source other than the CUFIN account, the are properly documented, necessary for of the recipient (although they are included in distribution is subject to 30% income tax at the taxpayer’s business operations and the income base for calculating profit sharing).

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The income tax law aims to recognize the Other nondeductible items include: the following categories: “real” reduction in debt that occurs as a result •• Items that do not meet the formal of inflation and as a corollary, the decrease in ––The foreign entity is a transparent invoice requirements, income tax or VAT the return on assets. The legislation provides entity (except where shareholders or payments; that any excess of the inflationary reduction members are subject to an income in debt over the amount of interest paid is •• Inflation adjustments made as a result of tax and the payment is made on arm’s taxable as an “inflationary profit,” but any ad hoc tax payments; length terms); excess of the inflationary increase in the value •• Provisions for employee liability and of assets over the return on assets is tax ––The payment is disregarded for tax indemnity reserves; deductible. The system treats both foreign purposes in the country or territory in exchange losses and net gains from the sale •• Goodwill; which the foreign entity is located; or of financial instruments (e.g. petro bonds) •• Payments made other than on an arm’s as interest. ––The foreign entity does not consider length basis to a related or unrelated the payment to be taxable income individual, entity, trust, joint venture, Depreciation (unless the foreign entity recognizes the investment fund or any other legal person Depreciation is calculated on a straight-line payment as taxable income in the same subject to a preferential tax regime. basis. Depreciation rates are set by the fiscal year or in the following year). government and vary by industry and type –– In response to the OECD base erosion and of asset. profit shifting (BEPS) initiative, limitations are •• Payments made to related parties in imposed on the deduction of payments made Mexico and abroad are nondeductible if Losses to related parties in Mexico and abroad: they also are deductible for the related Tax losses may be carried forward and parties, other than where the related party deducted from the taxable profits obtained •• Interest, royalties and technical assistance accrues the income. in the following 10 fiscal years. The fees paid to a foreign company (whether carryback of losses is not permitted. Losses the foreign company is a controlled or not carried forward therefore are forfeited. controlling company) that fall within any of

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3.4 Capital gains taxation •• The Mexican corporation owns at least To obtain benefits under one of Mexico’s tax 10% of the first-tier company; treaties, the beneficiary must produce a tax residence certificate or a copy of its tax return Capital gains arising from the sale of •• The first-tier company owns at least 10% of filed for the most recent fiscal year that shows fixed assets, shares and real property are the second-tier company; and considered normal income and are subject that the beneficiary is resident in the treaty to the standard corporate tax rate. Mexican •• The Mexican government has concluded a partner country. Any relevant conditions in law allows the proceeds from the sale of real broad exchange of information agreement the treaty also must be satisfied, including property, shares and other fixed assets to be with the country in which the second-tier the filing of an information return related to indexed for inflation. company is resident. the tax situation of Mexican residents and nonresidents with a permanent establishment Nonresidents that sell shares of a Mexican Tax treaties in Mexico or the filing of the special report company are subject to tax at 25% on the Mexico has a broad tax treaty network, (dictamen fiscal) if that option was exercised. gross proceeds or 35% on the net proceeds if with most treaties following the OECD the nonresident has a representative in Mexico model treaty. Treaties generally provide The Mexican tax authorities may in some (provided the nonresident is neither located in for relief from double taxation on all cases request proof that double taxation a tax haven nor benefits from a preferential tax types of income, limit the taxation by one would, in fact, arise in the absence of treaty regime). A tax return relating to the sale must country of companies resident in the other benefits, by means of an affidavit signed be filed and a dictamen fiscal obtained from a and protect companies resident in one by the taxpayer's legal representative, Mexican public accountant certifying that the country from discriminatory taxation in the explaining the rules in the beneficiary’s reported gain is calculated correctly. other. Mexico’s treaties generally contain jurisdiction and providing any relevant OECD-compliant exchange of information documentation. Nonresidents that realize gains on the sale provisions. Mexico also has concluded of publicly traded shares are subject to a a number of tax information exchange 10% withholding tax on the net gain. The agreements with various jurisdictions. withholding will be made by the intermediary (i.e. the broker). Mexico Tax Treaty Network

Argentina Estonia Korea (ROK) Romania 3.5 Double taxation relief Australia Finland Kuwait Russia

Unilateral relief Austria France Latvia Singapore A resident taxpayer that is taxed in Mexico on foreign-source income is, in principle, granted Bahrain Germany Lithuania Slovakia both a direct and an indirect tax credit that Barbados Greece Luxembourg South Africa may be used against the taxpayer’s liability Belgium Hong Kong Malta Spain to Mexican income tax to the extent the foreign income is taxable in Mexico. This is Brazil Hungary Netherlands Sweden an ordinary foreign tax credit, i.e. it is limited Canada Iceland New Zealand Switzerland to the proportion of the income tax due on the resident’s total taxable income for the Chile India Norway Turkey year calculated under Mexican law which is China Indonesia Panama Ukraine attributable to the foreign-source income. United Arab Colombia Ireland Peru Income tax paid by a nonresident company Emirates that distributes dividends to another Czech Republic Israel Poland United Kingdom nonresident company, that, in turn, distributes dividends to a Mexican corporation, may be Denmark Italy Portugal United States credited against the Mexican corporation’s Ecuador Japan Qatar Uruguay income tax liability if the following conditions are satisfied:

•• The dividend and the income tax are accrued by the Mexican corporation;

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3.6 Anti-avoidance rules enjoyment or transfer of tangible assets; length principle; if not, the tax authorities the use or transfer of intangible assets; and may make any necessary adjustments and stock transfers. request: unpaid taxes; restatement for Transfer pricing Mexican taxpayers engaging in transactions inflation; interest; and fines that may range with domestic and foreign related parties General regulations allow shared between 55% and 75% of the unpaid tax are required to charge or pay the prices expenses incurred on a pro rata basis with (subject to reduction where documentary that would be agreed between independent nonresidents to be deductible if certain requirements are met). parties in comparable transactions, i.e. all requirements specified in the regulations transactions must comply with the arm’s are met, despite a specific provision to the contrary in the ITL. length principle. Mexico’s transfer pricing Three-tier transfer pricing rules generally follow the OECD transfer documentation pricing guidelines. In addition to the general deductibility requirement included in the published Mexico has adopted country-by- regulations (e.g. the expenses must be As discussed in 1.5 above, maquiladora country (CbC) reporting in accordance necessary for the company to carry out transactions must comply with special with the recommendations under its activities), there must be a justifiable transfer pricing rules to avoid creating a PE the OECD’s BEPS project. Under connection between the expenses incurred for a foreign principal. the rules, companies that enter into and the benefit received, or expected transactions with related parties to be received, by the company. If the Taxpayers should prepare and retain (in Mexico or abroad) and receive expenses were incurred between related documents proving that transactions income equal to or greater than MXN parties, the taxpayer must demonstrate with foreign related parties were agreed 708,898,920 (updates as of January that the allocation was agreed on arm’s using prices that would have been used 2018) must file a master file and a length terms. Specific transfer pricing by independent parties in comparable local file, and Mexican multinational documentation must be maintained for transactions. Taxpayers also are required enterprise groups that receive income prorated expense transactions between to file with their tax returns a detailed equal to or higher than MXN 12,000 related parties. information return on transactions with million also must file a CbC report. foreign related parties. Penalties apply for These files must be submitted to The tax authorities are empowered to verify failure to comply. the tax authorities no later than that transactions with related parties have December 31st of the following year. Mexico recognizes six transfer pricing been executed in accordance with the arm’s methods:

01. Comparable uncontrolled price method (CUP); 02. Resale price method (RPM); 03. Cost plus method (CPM); 04. Profit split method (PSM); 05. Residual profit split method (RPSM); and 06. Transactional operating margin method (TOPMM).

A hierarchy of methods is required in the order 1. to 6. above, with the CUP being the first choice. If this is rejected, the RPM can be considered, and so on. The taxpayer must demonstrate that the chosen method was the most appropriate or reliable based on all the available information.

Transactions within the scope of the transfer pricing rules are: the purchase and sale of goods; financing transactions; the provision or receipt of services; the use,

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Unilateral and bilateral advance pricing Debts incurred for the construction, Specific rules permit the nontaxation of agreements (APAs) may be negotiated, but operation or maintenance of productive active income in certain cases. Taxpayers transfer pricing documentation still must be infrastructure linked to strategic areas, earning income from a preferential tax retained for five years after the filing of the or for the generation of electricity, are regime must file an annual information tax return. Mutual agreement procedures excluded from the thin capitalization rules. return in February, as must taxpayers may apply under Mexico’s tax treaties. generating income from a jurisdiction Controlled foreign companies on the black list and those that conduct Companies, individuals and resident transactions through fiscally transparent Thin capitalization foreigners must pay tax on all earnings foreign legal vehicles or entities. Under the thin capitalization rules, interest from companies or accounts in low-tax paid by a Mexican resident company on a jurisdictions. Foreign-source income is Payments to a CFC generally are subject to loan from a nonresident related party is deemed to come from a low-tax jurisdiction a 40% withholding tax. nondeductible for income tax purposes if it is not subject to taxation abroad or if it to the extent the amount of debt exceeds is subject to a local income tax at a rate that Some exceptions to the rules apply. three times the shareholders' equity (i.e. the is less than 75% of Mexico’s statutory rate debt-to-equity ratio of the payer exceeds (i.e. less than 22.5%, while the statutory rate General anti-avoidance rule 3:1). is 30%). The ITL allows the tax authorities to deem transactions to have occurred Although the excess interest is not Passive income (i.e. dividends, interest, between related parties and to calculate deductible, it is not reclassified as a royalties, capital gains, income from the the Mexican-source income arising from constructive dividend. The thin cap sale and use or enjoyment of immovable such transactions. This rule is intended rules are not applicable to financial property, and income obtained without any to be applied to counter tax avoidance institutions, and the limit of three times consideration) derived directly or indirectly associated with preferential tax regimes the shareholder’s equity may be extended by a Mexican resident through a branch or and multinational companies. However, the if taxpayers obtain a favorable APA from any legal entity located in a jurisdiction with scope may be broader based on the actual the tax authorities, agreeing that the a preferential tax regime, will be subject to wording of the rule, given that it makes transactions are carried out at market taxation in Mexico in the year in which the reference to Mexican-source income. prices. income is derived. This is the only general substance-over- form rule in the Mexican tax legislation. The Mexican tax regime generally is formalistic and standard Mexican policy has been to provide for specific anti-avoidance rules.

BEPS The Mexican government has contributed to the development of the OECD action plan under the base erosion and profit shifting (BEPS) project and has actively participated in the detailed work streams. It considers a uniform and internationally coordinated approach to be most effective in preventing BEPS. The following table summarizes the steps Mexico has taken to implement the BEPS recommendations:

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Expected Action Notes on local country implementation timing VAT on business to The tax authority is considering the issue however there are no official sources of information customers digital Not yet known that suggest any changes would be made in the near future services (Action 1) The 2014 tax reform introduced a rule that disallows deductions for payments made in the form of interest, royalties or technical assistance fees to a nonresident entity that controls or is controlled by a Mexican taxpayer if the nonresident recipient is considered transparent and its owners are not subject to tax in that jurisdiction, if the country of residence of the recipient considers the payment to be disregarded or the recipient does not include the payment as part of its taxable income. January 1st, Hybrids (Action 2) In addition to the above, the 2014 tax reform also introduced a rule that disallows deductions 2014 for payments made to both Mexican and nonresident related parties in cases where such payments are deductible for the foreign related party. This rule will not apply if the related party accrues the corresponding income.

The compliance with this rule shall be disclosed by the corresponding CPA either in the Statutory tax report (Dictamen Fiscal) or in the Informative tax report situation (DISIF), if applicable. CFC provisions were introduced in Mexico in 1997 and they have been evolving since then. Already CFCs (Action 3) No modifications to this rules are expected in the near future. implemented.

General thin capitalization and back-to-back rules already exist in Mexico. Specifically, thin capitalization rules disallow the deduction of interests generated by excess debt (i.e., a 3:1 debt-to-equity ratio) lent by foreign related parties to Mexican residents.

Likewise, Mexican tax provisions establish that interests derived from back-to-back credits granted to Mexican entities or PEs, by either local or foreign related parties (including credits granted through a financial institutions), shall be treated as dividends for tax purposes. Specifically, back-to-back credits are deemed to consist of: •• Operations whereby a person furnishes cash, assets or services to another which in its turn furnishes cash, assets or services directly or indirectly to the former or to a party in a relationship with said former; or Interest deductions •• When a finance is granted and the credit is guaranteed with cash, a cash deposit, shares or Already (Action 4) debt instruments of any nature of the creditor or a related party, credits are deemed back- implemented. to-back credits to the extent of said guarantee;

In case the grant of the credit is conditioned to the execution of contracts granting an option right in favor of the lender or a related party of the latter, which exercise depends on partial or total default of payment either of the credit or of accessories, the credit will be deemed as guaranteed.

The compliance with this rules shall be disclosed by the corresponding CPA either in the Statutory tax report or in the Informative tax report situation, if applicable.

It is not yet known whether further changes will be made to the rules.

Since 2006, a provision was introduced in the Mexican Federal Tax Code by virtue of which it is established that Mexican Tax Authorities shall inform to taxpayers by publication in Harmful tax practices the Official Gazette of the Federation, the non-binding criteria regarding tax and customs Already (Action 5) provisions. This criteria are intended to discourage taxpayers from carrying out certain implemented. applications of tax provisions that, from the Mexican Tax Authorities’ point of view are undue. •• Mexico does not have any General Anti-Avoidance Rule, nevertheless with the MLI June 7th 2017 signature, the Simplified LOB plus the Principal Purpose Test were chosen as protection against treaty shopping. •• In addition to the above, the 2014 tax reform introduced a rule addressing the application January 1st, Prevent treaty abuse of tax treaties on intercompany transactions. Specifically, it states that for this specific 2014 (Action 6) cases, foreign entities shall demonstrate through an affidavit that a double taxation would arise in the foreign entity’s country of residence if treaty benefits are not granted. •• Normally, for purposes of evoking the benefits of double taxation treaties certain formalities apply.

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Expected Action Notes on local country implementation timing Mexican tax provisions already include permanent establishment rules that state: Already implemented •• The assumptions under which a PE may be deemed to be created by a foreign resident; and •• The list of activities and situations that should be considered as exemptions in the creation of a PE in Mexico.

With the signature of the MLI, Mexico notified that it’s bilateral agreements already contain: June 7th, 2017 •• The assumptions under which a PE through an independent agent, may be deemed; Permanent establishment status •• Definition of activities that do not constitute a PE; (Action 7) On the other hand, derived from the Mexican Energy Reform, a specific provision January 1st, regarding PE status was included in the Hydrocarbons Income Law. This provision states 2014 that the constitution of a PE will be deemed in cases where a foreign resident carried out hydrocarbons extraction or exploration activities in Mexico for a period exceeding 30 days in any 12 months term.

In addition, Mexico has negotiated the inclusion of a new article addressing this 30-day PE consideration in protocols and treaties signed recently (i.e., Argentina, Spain, Saudi Arabia, and Jamaica, among others). Transfer pricing Mexico has existing transfer pricing rules that generally follow the OECD transfer pricing Not yet known. (Actions 8-10) guidelines. It is not yet known how the proposed changes will be implemented. The 2014 tax reform introduced the obligation for taxpayers to submit on a quarterly basis Already the Form 76: Informative tax return for relevant transactions. Specifically, taxpayers shall implemented disclose information to Mexican tax authorities about (i) financial derivative instruments, (ii) (January 1st, transfer pricing transactions, (iii) participation in equity and residence for tax purposes, (iv) 2014) corporate restructures and reorganizations and (v) other relevant transactions such as sales of intangible or financial assets, sales through mergers or spin-offs.

Due to the Anti money laundering law issued in 2012, the Financial Intelligence Unit On December established the obligation for certain taxpayers for the submission of vulnerable activities’ 16th, 2016, Disclosure of aggressive notices and informs. the Financial tax planning (Action 12) Intelligence Unit issued the last version of official formats for the presentation of vulnerable activities’ notices and informs. 31 December Transfer pricing The 2016 tax reform amended the Income Tax Law to implement the transfer pricing (master 2018, to be documentation (Action file/local file) documentation requirement. Mexican companies must submit the required reported by 13) documents by the end of the year (i.e. 31 December) following the fiscal year. 31 December 2019. 31 December The 2016 tax reform introduced CbC reporting by large multinational enterprises based 2018, to be CbC reporting (Action in Mexico. The rules conform to the minimum standard in Action 13. Mexico is one of the reported by 13) countries that signed a multilateral competent authority agreement for the automatic 31 December exchange of CbC reports. 2019. Dispute resolution Mexico opted out of arbitration in the MLI (June 7th, 2017). Not yet known. (Action 14)

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Statutory tax report and tax situation In addition, all companies which execute Companies may apply for a reduction in the report transactions with related parties abroad advance payments, although any delay in SIPRED, which stands for “Sistema de must submit the Annex 9 of the Multiple making the payments will result in interest presentación del dictamen fiscal”, is the Informative Return (“DIM”), prior to filing the charges. Higher charges are applicable for optional filing system for the statutory tax SIPRED or DISIF, or along with the Annual Tax unauthorized delays. report, certified by an authorized public Return (deadline on March 31st) if neither the accountant. Taxpayers which meet any of the SIPRED or DISIF will be filed. Annex 9 of the DIM The annual tax return must be filed no later following criteria may choose to file this report: requests information on every transaction with than 31 March of the year following the tax foreign related parties, along with the results year, with the balance of tax due at that time. •• Taxpayers with taxable income exceeding of the application of a transfer pricing method $100,000,000.00 Mexican pesos; (including interquartile range, SIC codes, Taxpayers that have their financial statements •• Taxpayers with assets exceeding number observations, etc.). Thus, transfer audited by a certified public accountant may $79,000,000.00 Mexican pesos; or pricing documentation must be prepared file these statements (along with the auditor’s contemporaneously in order to have the opinion on the taxpayer’s compliance with the •• Taxpayers with a headcount of at least 300 results in time for the presentation of Annex 9. tax law) by 15 July of the year following the tax employees during each month of the fiscal year. year. Disclosure of relevant transactions Finally, a quarterly form must be filled and An information tax return that includes The SIPRED must be filed no later than July submitted (Form 76) if a taxpayer performs information on withholding, payments abroad, 15th of the year following the end of the a business restructure, if there are changes etc. must be submitted to the tax authorities fiscal year. in the ownership, or if a transfer pricing no later than 15 February of each year. adjustment is applied on a transaction of the On the other hand, the DISIF, which stands current or past fiscal years, which modifies Penalty interest for the late payment of tax is for “declaración informativa sobre situación the value of a transaction in more than 20% assessed at 0.98% per month if an extension fiscal”, is an informative return on the tax of the original amount, or if the accumulated has been granted; otherwise the rate is position. Taxpayers under the following adjustment amount exceeds MXN 60 million. 1.47%. Penalty rates are adjusted monthly. circumstances must submit this return, Form 76 must be filed one month after the along with their annual tax return: end of each quarter, if during said quarter the Consolidated returns •• Taxpayers with taxable income equal or aforementioned adjustments were carried The 2014 tax reform abolished the tax greater than $708,898,920 Mexican pesos out. In addition, Rule 3.9.1.1. to 3.9.1.4. of the consolidation regime. However, taxpayers (updated as of January 2018); Omnibus Tax Resolution for 2018 set forth that were within the mandatory five-year additional documentation requirements for deferral period as at 31 December 2013 •• Public companies; the deduction of transfer pricing adjustments, have the option to continue to consolidate •• Taxpayers under the optional regime for including transfer pricing documentation until the end of that period and must pay groups of entities; with the calculation of the adjustment and the deferred tax using the mechanism evidence that its application results in an established in the 2014 transition rules. •• Parastatal entities; arm’s length operation. •• Foreign residents with a permanent An optional “tax integration” regime establishment in Mexico; and replaced the consolidation regime, under 3.7 Administration which corporate groups can elect to •• Taxpayers which execute transactions with calculate income tax on a consolidated foreign related parties during the fiscal year. Tax year basis. The regime provides certain benefits The tax year is the calendar year. for payment of tax when companies have Taxpayers which choose to file the SIPRED, profits or losses in the same year within a in doing so, their obligation to file the DISIF Filing and payment corporate group. For tax purposes, a group will be considered fulfilled. Corporate taxpayers must make 12 advance consists of a Mexican holding company and income tax payments on the 17th day of the all Mexican subsidiaries in which the holding Both the SIPRED and DISIF contain specific month. Advance payments are based on company holds directly or indirectly more appendices requesting information on the preceding five most recent fiscal years than 80% of the voting shares. Tax may be transactions with foreign and domestic in which a profit could be calculated, even if deferred for a maximum of three years. related parties, and a questionnaire on the there was a loss in the immediately preceding transactions with related parties. fiscal period. All companies must use the calendar year for financial and tax purposes.

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Statute of limitations The authorities must make a decision within including applicable contributions and taxes, The rights of the tax authorities in relation to three months from the date of filing of a of the Mexican government and private audit, enforcement, assessment and collection petition. If no decision is made within this companies with respect to contracts for the of taxes expire after five years from the date period, the request is deemed to have been exploration and extraction of hydrocarbons. on which the tax return is due. The income tax denied. Where the request is denied or The law also establishes a framework for return initially is filed by 31 March of the year deemed denied, the taxpayer may appeal to government/private company participation following the taxable year end and the statute the Federal Tax Court only for the purposes in such activities and a tax regime for income of limitations begins on 1 April of each given of obtaining the written resolution. arising from such activities. Mexican state- period. A tax audit report (optional) prepared owned production entities and Mexican by an independent certified public accountant Where a taxpayer receives a favorable corporations may participate in public tenders must be filed by 15 July of the following year. An written rulings, the taxpayer is granted the individually, as joint ventures or as consortia. amended return must be submitted if there rights in the ruling, although the ruling is are any differences between the figures not binding on the taxpayer. However, the The most significant features of the used in the tax return and the outcome of taxpayer may contest a favorable ruling only hydrocarbons legislation are as follows: the tax audit report. after the tax authorities actually applied it to the taxpayer’s situation. Each public bid for the blocks to be The statute of limitations will be extended contracted for the exploration and for five years as from the date an amended Administrative rulings concerning the extraction of hydrocarbons must comply return is prepared for any category of items taxation of a specific taxpayer or group of with the fundamental principles included in adjusted in an amended return. The term taxpayers are effective only for the period in the Mexican Constitution, the Hydrocarbons is 10 years if the taxpayer is not registered which they are issued. If the ruling is issued Law, the Hydrocarbons Revenue Law and the with the tax administration, does not within three months from the end of the tax entire new legal framework for the sector. maintain accounting records or fails to file period, it may be applied for the preceding a tax return. In the latter case, the 10-year tax period. At the end of the period for On top of the of the Corporate Income Tax, term is computed from the date the return which the ruling remains effective, the specific rates over the contractual price or should have been submitted. The statute of taxpayer must take steps to obtain a new operating revenue are derived from the limitations is suspended if the taxpayer files ruling, if a ruling still is needed. contractual arrangements offered thru a an administrative appeal or commences bidding process owing to significant differences litigation, if the authorities begin an audit This rule is not applicable to authorizations in the risk and cost structure of different areas/ of the taxpayer’s accounting records or if for deferrals of payments and approvals of blocks, following the general principles set out the tax authorities are unable to initiate an guarantees, depreciation allowances and in the Hydrocarbons Revenue Law. audit because the taxpayer failed to notify sales of shares that are publicly traded. the authorities of a change in domicile. Exploration phase fees, as well as royalties, apply. Tax authorities 3.8 Other taxes on business The SAT is a decentralized agency responsible The normal 10-year carry forward period for the assessment and collection of Background for net operating losses is extended to 15 federal taxes and customs duties, while the Constitutional amendments and legislation years for taxpayers that carry out activities Departments of Finance of each state or introduced in 2013 and 2014 heralded a in deep water offshore wells. municipality are responsible for collecting seismic shift in Mexico’s energy sector—the state and local taxes. The federal government state oil monopoly ended and the sector Special depreciation rates apply as follows: and the states have entered into agreements was opened to private foreign and local for tax coordination and administrative investors for the first time since 1938. This 100% on assets used for exploration, cooperation, with the states responsible for was followed by legislation that clarifies the secondary and enhanced recovery and collecting and auditing the correct payment of steps needed to transition opportunities to maintenance; federal taxes. reality. 25% on assets used for the development Rulings Hydrocarbons sector and exploitation of fields; and Taxpayers may petition the tax administration As from August 2014, companies engaged for a (non-hypothetical) ruling in connection in oil exploration and production are subject 10% on investments for storage and with the interpretation of tax provisions in to a special tax regime as set out in the transportation (e.g. pipelines, tanks, etc.). specific cases that are not already under Hydrocarbons Revenue Law. The legislation review by the tax authorities. sets out the rights and responsibilities,

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A 0% VAT rate applies on hydrocarbon sources or efficient co-generation systems may The new vehicle will serve for all types exploration and extraction activities to the be fully deducted in the year of acquisition. of companies (both private and with extent that the activities are carried out government participation) with projects or with the Mexican Oil Fund. A tax incentive exists to allow a deduction for stabilized assets that generate stable cash the present value of depreciation corresponding flows, and to be offered to the investors In addition to the consideration paid by a to investments (new fixed assets) made in in exchange for resources that companies contractor to the Mexican federal government, equipment for the generation, transmission, can continue to invest in new projects. the contractor is required to pay a monthly distribution and supply of energy, as well as The new instrument is designed to attract tax for the exploration and extraction certain hydrocarbon activities. This incentive capital into the energy sector, and comes of hydrocarbons, used to pay for the also applies to investments in the construction at a time when a plunge in oil prices and environmental impact of the activities destined and improvement of transport infrastructure, a dwindling production hit the Mexican to the municipal and state governments and such as roads. state-owned oil company, Pemex. is payable at MXN 1,150 per square kilometer (km2) during the exploration phase and MXN Companies engaged in the generation of It is anticipated that like the FIBRA, the 6,500 per km2 during the extraction phase. renewable energy or the co-generation of FIBRA E, will issues certificates to operate electricity are permitted to set up a special net as stocks and allow investors to participate Power sector profit account for investment in renewable in the Mexican energy infrastructure. Since the 1930s, the Federal Commission energy to allow the distribution of dividends. The trust might be required to distribute of Electricity (CFE) has dominated Mexico’s at least 95% of their taxable income and electricity sector by providing generation, Interest payments made by a Mexican will not pay any corporate taxes, as the transmission and distribution services to the resident company on a loan from a certificate holders will be withheld upon entire country. Various reforms in the early nonresident related party are nondeductible payments. 1990’s opened the door to foreign and private for income tax purposes to the extent investment in electricity generation in Mexico that the debt-to-equity ratio of the payer CERPI with limitations. Now, thru the liberalization company exceeds 3:1. Debts incurred for the The Investment Project Backed Certificates of the nation’s electricity industry, Power construction, operation or maintenance of (CERPI) are focused on pension funds Generation is subject to free competition as the productive infrastructure linked to strategic (Afores), insurance companies and private companies are allowed to participate in areas, or for the generation of electricity, are other domestic and foreign institutional power generation and sale of electricity in the excluded from the thin capitalization rules. investors.They can invest in a wide range wholesale market, just as the CFE. of projects in all productive sectors of the The development of a power projects likely economy, especially in the energy sector. Furthermore, the Energy Transition Law will require securing land use at an early regulates the sustainable use of energy, creates stage. Diverse compensation schemes FICAP obligations for the electric industry to transition for landowners have been implemented Investment Trusts for Private Equity to clean energy use and reduce pollutant (i.e. acquisition of land, lease payments, (FICAP) were created for the sole purpose emissions, while maintaining productivity and usufruct, right of way, etc.), regardless of of investing in shares issued by Mexican competitiveness. It also establishes the basis whether the landowner is registered for tax companies that are not listed on the for determining specific obligations relating purposes. Because the deduction of such stock exchange at the time of investment, to the sustainable use of energy and electric payments may be jeopardized if formalities as well as in providing financing to such efficiency and promoting the use of renewable are not complied with (e.g. the issuance of an companies. resources. Clean energy for purposes of the law invoice), the tax authorities have issued an includes wind, solar, hydraulic, co-generation administrative rule to facilitate compliance. As from 2016, the limit of 10 years was and geothermal energy. All participants in the removed, making the FICAP trust an power industry, such as producers, wholesalers, Investment vehicles indefinite vehicle. contract holders and certain users, are required to comply with the law. FIBRA E Taxation of mining income FIBRA E allows access to investors to projects A special mining right royalty of 7.5% Mexican tax law contains some provisions in the energy and infrastructure sectors, is applied to net profits derived by a specific to the power sector that may under conditions similar to those offered concession holder from the sale or transfer incentivize the use of clean technology: by its real estate counterpart (FIBRA, which of extraction activities. Profits for purposes is based on the US Real Estate Investment of the royalty are determined in a manner Investments in machinery and equipment Trusts, REIT). similar to the calculation of general taxable for the generation of power from renewable income, with some exceptions (e.g. interest

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and the annual inflation adjustments are not included in income and deductions are not available for investment in fixed assets, interest and the annual inflation adjustment, etc.). The mining royalty must be paid annually by the last business day of March of the year following the tax year.

If a concession holder does not carry out exploration and exploitation activities for two continuous years within the first 11 years of its concession title, it is required to pay an additional charge equal to 50% of the maximum fee. The fee will be increased to 100% for continued inactivity after the 12th year. Payment of the additional mining duty is due 30 days after the end of the two-year period.

Owners of mining concessions also are required to pay an additional 0.5% tax on gross income derived from the sale of gold, silver and platinum. The mining royalty is due annually by the last business day of March of the year following the tax year.

27 A Guide to Investing in Mexico 2019 | Withholding taxes

4.0 Withholding taxes

Mexican entities that make payments to •• 4.9% on interest paid to foreign banks Business enterprises that pay fees or make resident individuals or nonresident entities or registered as banks in Mexico and resident rental payments to a nonresident must individuals are required to withhold and pay in tax treaty countries; and interest paid to withhold 25% tax on such payments. An the tax over to the Mexican tax authorities on nonresident financial institutions in which information statement must be submitted behalf of the recipient. Withholding agents the federal government owns a percentage to the tax authorities in February of the must file an annual information return detailing of the paid-up capital, provided certain following year. transactions with nonresidents. Tax withheld conditions are satisfied and they are the generally must be paid by the 17th day of the beneficial owners of the interest. The 4.9% Mexican-source royalty payments made to month following the month of the withholding. rate also applies to interest paid in respect related parties located in a tax haven are Withholding agents are jointly liable for the of publicly traded securities in Mexico and subject to a punitive 40% withholding tax incorrect withholding and/or failure to pay, securities publicly traded abroad through rate rather than the normal withholding tax and may be subject to additional interest and banks and stockbroking firms in a country rates applicable to payments abroad. penalties. that has concluded a tax treaty with Mexico; however, if these conditions are not satisfied, the rate is 10%. 4.4 Branch remittance tax 4.1 Dividends •• 15% on interest paid to reinsurance Permanent establishments distributing companies and interest on finance leases. Mexico imposes a 10% withholding tax on dividends or gains to a head office are dividends distributed by a Mexican entity to •• 21% on interest that is not subject to subject to an additional tax of 10% on such a nonresident company or individual. The the 4.9% or 10% rates and interest paid distributions. tax is considered a final tax and the rate to nonresident suppliers financing the may be reduced under an applicable tax acquisition of machinery and equipment treaty. that is included in the fixed assets of the 4.5 Wage tax / social acquirer. security contributions A 10% withholding tax also is imposed on •• 40% on interest paid to a related party dividends distributed by a Mexican entity to located in a tax haven. Payroll taxes apply at the state level at rates individuals resident in Mexico, which may be ranging from 1% to 3% of salaries (3% in reduced if profits generated in 2014, 2015 •• 35% in all other cases. Mexico City) and the tax is withheld by the and 2016 are reinvested and distributed as employer. All types of remuneration paid from 2017, as follows: 4.3 Royalties to an employee, including fringe benefits that are not tax-free, must be taken into Mexico Tax Treaty Applicable to the account in calculating the monthly income Payments made abroad for technical Network dividend (%) tax withholding. assistance, know-how, use of models, plans, 2017 1 formulae and similar technology transfer, Some local tax authorities also require including use of commercial, industrial or 2018 2 withholding on payments for personal scientific information or equipment, are independent services rendered in their 2019 onwards 5 subject to 25% withholding tax. Royalties territory where the service provider is not paid to a foreign licensor of patents, registered as a taxpayer and is resident trademarks and trade names—without outside the territory. The tax is deductible the rendering of technical assistance—are 4.2 Interest for income tax purposes. subject to 35% withholding tax, unless the rate is reduced under an applicable tax Mexico levies several different rates of treaty. withholding tax on interest paid abroad. The rates are as follows:

28 A Guide to Investing in Mexico 2019 | Withholding taxes

Employers must contribute an amount equivalent to 2% of payroll to an employee retirement fund and 5% of the total payroll to a housing fund (which will be added to the retirement fund if not used for a housing credit) that, together, constitute a pension fund managed by private financial institutions.

In accordance with the incentive framework for sustainable economic growth of Mexico City, individuals or entities that establish environmental programs may receive, subject to validation by the Ministry of Environment, reductions in payroll taxes ranging from 20% to 40%.

29 A Guide to Investing in Mexico 2019 | Indirect taxes

5.0 Indirect taxes

5.1 Value added tax However, a maquiladora or bonded Companies must submit a VAT return on a warehouse is allowed to apply a credit in the monthly basis, making the VAT payments VAT is levied on the supply of goods, the month the VAT or ET is due if the entity has for the preceding month, by the 17th day of provision of services, the import of goods been “certified” for VAT and ET purposes the month. For imports, VAT is based on the or services, leasing transactions and export by the Mexican tax authorities. Companies customs value plus tariffs. of goods and services. Interest on non- that do not obtain the certification will be business loans and credit card debt also is required to pay VAT and any applicable VAT taxpayers must periodically submit subject to VAT. ET on their temporary imports under the information on their main clients, service customs regimes for maquiladoras and for providers and suppliers. The standard VAT rate is 16%; VAT on companies operating under an automotive imports is assessed on the customs value bonded warehouse, strategic bonded All entities engaging in VATable transactions of the import, plus the import duty. A zero warehouse or bonded warehouse regimes; in Mexico must register for VAT purposes. rate applies to exports and services used with the VAT and ET recoverable only after Nonresident entities that have a PE in Mexico abroad if the services are contracted and the goods are exported. for income tax purposes, also must register. paid for by a nonresident with a PE in Mexico. The following supplies are exempt: There are guidelines and requirements to For preoperative expenses the VAT paid land and residential buildings; books and obtain certification, as well as the benefits. could be creditable in: (i) The month that the newspapers; share transfers; used chattels; A three-tier rating system (A, AA and AAA) is taxpayers begin with their operations; (ii) tickets and other documentation permitting used to assess the controls and overall tax Request a refund based upon an estimation participation in lotteries, raffles, games and customs compliance of maquiladoras and description of the expenses. of chance and competitions; national and or companies operating under the regimes foreign currency; gold and silver pieces; and of automotive bonded warehouse, Customs and foreign trade inventory the sale of goods between nonresidents strategic bonded warehouse or bonded controls must be kept permanently and or by a nonresident to a Mexican entity warehouse regimes. If maquila companies VAT credit granted for import operations registered under an authorized program to or companies operating under one of the must be monitored in order to submit on a promote the export of goods. bonded warehouse regimes do not obtain monthly basis the actual goods leaving the a certification for VAT and ET purposes, country as finished product, thus offsetting Special customs rules are applicable to such companies may use as an alternative a the credit balance. maquiladoras that enable the sale of goods bond issued by a financial institution. between nonresidents at an exempt VAT Mexico does not allow VAT grouping. rate when the goods are delivered from one Companies may credit VAT payments maquiladora to another, following certain against income or other tax payments; if the customs formalities to virtually export the excess cannot be credited in its entirety, the 5.2 Capital tax goods. taxpayer may apply for a refund. Mexico does not levy capital tax. Temporary imports for maquiladoras and Under the VAT regime, each party in the companies operating under the automotive supply chain charges VAT to its customer bonded warehouse, strategic bonded and pays the difference between the tax 5.3 Real estate tax warehouse or bonded warehouse regimes charged by its suppliers and the tax charged The municipal authorities levy “rates” on are subject to VAT at 16% at the time the to its customers to the tax authorities. VAT the ownership of real property. Rates are goods are introduced into Mexican territory is borne by the ultimate consumer. deductible in calculating corporation tax and may be subject to excise tax (ET) at liability. various rates depending on the type of goods. Since export activities are zero-rated, exporting companies may derive favorable VAT balances that are subject to refund/ offset.

30 A Guide to Investing in Mexico 2019 | Indirect taxes

5.4 Transfer tax improving competitiveness. PROSEC basically 5.7 Environmental taxes enables the import of specific goods (e.g. Transfer tax at a rate between 2% and 5% components, parts, raw materials, capital Mexico imposes tax on to the import applies to the transfer of real estate. assets, etc.) at listed preferential general and sale of fossil fuels other than natural import duty rates, provided these are used gas, with specific rates for certain types only in the manufacturing process, with of fuel. The tax will be payable through 5.5 Stamp duty no conditions on the place of origin and carbon credits, which are defined as no requirement to export the resulting those authorized in the Kyoto Protocol Mexico does not levy stamp duty. products. and supported by the UN within the UN Framework Convention on Climate Change. The IMMEX regime also was created to A second environmental tax applies on 5.6 Customs and excise encourage foreign investment by granting the import and sale of pesticides at rates authorized companies certain tax and duties ranging between 6% and 9%, depending on customs benefits, which include: the degree of toxicity.

Customs duties must be paid on the •• Possible deferral of and in some cases exemption from, the general import duty; import or export of goods according to the 5.8 Other taxes following: •• Administrative and customs benefits to facilitate operations and reduce costs; and •• General import and export tax – Tax on production and services determined according to the tariff •• Tax benefits (see above under 1.5). A tax on production and services is charged classification number of the goods; on manufacturers and wholesalers of Under the IMMEX program, VAT at 16% certain goods, including alcoholic beverages •• Customs processing fee – paid for using and tobacco. The rates vary by product. the Customs facilities, personnel and is paid on imports. However, a maquila systems, etc.; company can avoid paying the VAT/ET upon import by obtaining certification from the “Junk food” tax •• Electronic prevalidation data – Mexican tax authorities. If a maquiladora A tax is levied on beverages containing approximately 16 USD per import is certified, VAT technically will be imposed sugar at a rate of MXN 1 per liter and an document processed; on goods imported for use in maquila 8% tax is imposed on food with a calorific production activities, but will be eliminated density of 275 kilocalories or more for every •• VAT – payable at 16% on imports and 0% 100 grams. on exports; by a full tax credit so that no cash VAT will be imposed on such transactions. If the •• Excise tax – determined according to the maquiladora cannot obtain certification, it nature of the exported goods; and will be able to satisfy its liability for VAT/ET duty on temporary imports by providing •• Special tax on production and services – see below under 5.7 and 5.8. security via a bond issued by an authorized entity. The treatment of goods imported into Mexico and the tax and customs obligations are determined based on the purpose of the foreign trade transaction. These purposes are classified into five customs regimes for imported goods: definitive, temporary, transit of goods, fiscal deposits “in bond” and strategic bonded warehouse.

As noted above, Mexico has concluded a number of free trade agreements and has introduced the PROSEC and IMMEX regimes.

PROSEC aims to encourage the manufacture of products in Mexico within strategic industrial sectors, with the main objective of

31 A Guide to Investing in Mexico 2019 | Taxes on individuals

6.0 Taxes on individuals

Mexico Quick Tax Facts for Individuals times the legal minimum salary for the region. Severance payment benefits are Income tax rates Progressive up to 35% exempt up to 90 times the daily base salary Capital gains tax rates 10% / progressive up to 35% of the region multiplied by the number of years for which the individual has been Basis Worldwide employed. Double taxation relief Yes Individuals with business or professional Tax year Calendar year income are subject to ordinary income tax Return due date April rates and may deduct normal business expenses according to rules similar to those Withholding tax for business enterprises. - Dividends 10% In calculating capital gains for tax purposes, - Interest 4.9%/10%/15%/21%/35%/40% individuals are entitled to increase the historical - Royalties 25%/35%/40% cost of an asset by a factor to allow for inflation and reduce the cost by accumulated Net wealth tax No depreciation at a rate varying with the type of Social security Varies asset. The difference between the result and the sales price constitutes the net gain. Based Inheritance tax No on the number of years for which the asset Real estate tax State / municipal level was held, a certain proportion of the net gain is added to other taxable income to determine the VAT 16% top rate of tax payable. Excise tax Varies Capital gains arising from an individual’s sale of publicly traded shares, including financial 6.1 Residence 6.2 Taxable income and derivative operations relating to such shares, rates are subject to tax at 10%. An individual is resident if he/she has a permanent home in Mexico. If an individual Resident individuals (regardless of their Some states and Mexico City impose separate has a home in two countries, the key factor is nationality) are subject to Mexican income taxes on wages and salaries, which are usually the location of his/her center of vital interests. tax on their worldwide income. Nonresident payable by employers. Foreign nationals, in principle, are considered individuals are taxed only on Mexican- tax residents, subject to the permanent home source income. Deductions and reliefs and/or center-of-vital-interests test. The following expenses are deductible in Taxable income computing taxable income for personal In terms of the immigration law, foreign Individuals are taxed on income received income tax purposes: nationals permanently residing in Mexico enjoy in cash, in kind or credit, and in certain the same rights as citizens (other than the right •• Medical, dental fees, for professional services cases, in services. Taxable income includes to vote) and incur the same responsibilities. in the field of psychology and nutrition remuneration for personal services Permanent resident status, which is completely provided by people with professional (including salary, bonuses and special different to tax status, may be obtained after title legally issued and registered by the allowances, such as housing), interest, residing in Mexico for four years. competent educational authorities and corporate dividends paid out of gross hospital expenses incurred by the taxpayer income, capital gains, rental income, etc. and the taxpayer’s spouse or other Pension benefits are tax-exempt up to nine

32 A Guide to Investing in Mexico 2019 | Taxes on individuals

dependents with income no higher than the Dividend income is added to other taxable 6.5 Real property tax annual minimum salary; income and taxed at the appropriate progressive rate. •• Unlimited medical and dental fees and The municipal authorities levy “rates” on hospital expenses incurred by a taxpayer the ownership of real property. These are Capital gains arising from a sale of publicly with a disability; deductible in calculating an individual’s traded shares by an individual, including taxable income from the letting of such •• Health insurance premiums and charitable financial derivative operations relating to property. donations; such shares, are subject to capital gains tax at 10%. •• Mortgage interest payments (real interest) when mortgage credit is up to 750,000 6.6 Social security Nonresidents on temporary assignment investment units or Unidades de Inversión working for firms or subsidiaries based in contributions (UDIS); Mexico are exempt from income tax on the •• Personal pension account contributions; and first MXN 125,900 of income for a period Employed individuals are required to make of 12 months; they are taxed at 15% on social security contributions based on •• School transport costs of direct income from MXN 125,901 to MXN 1 million; salary, subject to a ceiling of 25 times the descendants, when such transport is and all income in excess of MXN 1 million is daily minimum wage salary of the region. mandatory under domestic law. taxed at 30%, with no deductions allowed. Nonresidents on temporary assignment All personal deductions (except those that are paid by nonresident foreign 6.7 Other taxes expressly mentioned above) are limited firms are exempt from income tax if the to the lower of: (i) five times the annual employee spends less than 183 days (which None. minimum salary or (ii) 15% of the total need not be consecutive) in Mexico in a income (taxable and nontaxable). 12-month period. Otherwise, the employee will be subject to tax. Taxes paid as a 6.8 Compliance Taxpayers whose income consists of nonresident are considered final and there professional fees may deduct normal and is no obligation to file annual tax return. The tax year for resident individuals is the documented expenses, similar to those calendar year. The tax year for nonresidents deductible by businesses. A simplified tax who pay income tax on Mexican-source system for individual taxpayers that engage 6.3 Inheritance and gift tax compensation is the 12-month period that in business activities is available, known as commences with the first month for which the Tax Incorporation Regime or RIF. Mexico does not levy inheritance or gift tax. the nonresident is subject to tax.

Rates Married individuals may not file a joint Personal income tax rates are progressive 6.4 Net wealth tax tax return. If both spouses have taxable up to 35%. Employers withhold provisional income, each spouse must file a separate tax payments on wage income. Mexico does not levy a net wealth tax. return.

Tax on employment income is withheld by the employer and remitted to the tax authorities. Income not subject to withholding is self-assessed; the individual must file a monthly tax return by the 17th of the following month. An annual tax return must be filed in April of the following year.

33 A Guide to Investing in Mexico 2019| Labor environment

7.0 Labor environment 7.1 Employee rights and The average increase approved for 2018 to Other benefits the general minimum wage and the minimum Certain forms of employee compensation compensation wages specified for various professions was are tax-exempt for the employee, e.g. fringe 3.9%. Typical minimum professional wages benefits, employees’ savings and loan funds, Labor relationships in Mexico are regulated by include: severance payments, annual bonus, overtime, the Mexican Federal Labor Law (MFLL) and the Minimum daily vacation premium, Sunday premium and the Profession Mexican constitution. The MFLL regulates labor wage (MXN) exempt portion of employee profit sharing. agreements, compensation, forms of payment, Reporter 236.28 Only 53% of such payments are tax-deductible hours of work, legal holidays and paid vacations, Social work for the employer. Where an employer reduces 129.98 among other working conditions, as well as labor technician the amount of such forms of compensation, unions, strikes and termination of employment. Repairman 119.18 the deductibility threshold for the employer is The MFLL also regulates outsourcing reduced to 47%. arrangements, which are common in Mexico, Carpenter 112.83 under which one company contracts to provide Driver 107.14 The MFLL grants seven paid holidays annually, services for another company that could also Bartender 104.34 plus one for inauguration day every sixth year. be or usually have been provided in-house. Petrol station Labor contracts provide for another nine to 10 employee / 101.80 days of paid holiday. After working for a year, Regulations issued by the Ministry of Labor security guard employees are entitled to at least six days’ paid and Social Welfare specify allowable workplace Supermarket / 99.66 vacation, increased by two days for each of practices with a focus on assessing risk, hotel employee the subsequent three years. A bonus of 25% preventing accidents and educating workers Under a compulsory form of profit sharing, of normal pay during the vacation period is on potential hazards. The safety regulations all firms must distribute 10% of their pretax mandatory. Furthermore, a Christmas bonus emphasize self-regulation and allow private profits to employees (some exceptions apply of 15 days’ pay also is obligatory and must be sector “certifiers” to conduct safety inspections. to partnerships). paid before 20 December. Companies must contribute a sum equal to 5% of payroll to the Working hours Pensions national workers’ housing institute (Infonavit); The work week consists of eight hour days for Employers must contribute an amount funds go into special accounts for employees the day shift, seven hour days for the night shift equivalent to 2% of payroll to an employee (see Pensions above). and seven and a half hour days for a mixed shift, retirement fund and 5% of the total payroll with a half hour break in all cases. For every to a housing fund (which will be added to Companies with more than 100 employees six day work period, an employee is entitled the retirement fund if not used for a housing must maintain a fully equipped infirmary to one day of rest with full pay (compensation credit) that, together, constitute a pension fund under the supervision of a qualified doctor; is calculated on a seven day week). Overtime managed by private financial institutions. The firms with more than 300 employees must is paid at twice the normal rate and may not usual retirement age is between 65-70. establish hospital facilities. exceed nine hours per week. Any additional hours worked must be paid at triple the normal Social insurance In addition to the mandatory fringe rate. Workers receive a 25% premium for The social security system, administered by the benefits, most labor contracts provide for Sunday work. Mexican Institute of Social Security (Instituto “voluntary” benefits such as savings plans, Mexicano del Seguro Social or IMSS), provides life insurance, lunches and food coupons many benefits. Its programs cover work-related (vales de despensa). Most large companies 7.2 Wages and benefits accidents and illness; non-occupational maintain a canteen on the premises that diseases and paid maternity leave; old age and provides below-cost meals to employees. The National Minimum Wage Commission, a various death benefits; and unemployment Many companies supply work clothes. Some tripartite group comprising representatives of insurance. The cost of the system is shared employers set up additional incentive plans business, labor and government, set the general between employers, employees and the to stimulate production and sales. To qualify minimum wage for 2018 at MXN 88.36 per day. government. Employers generally bear most of for tax deductions, fringe benefits generally This rate is applicable to all individuals employed the cost, with their share being approximately must be provided to all employees. in the Mexican territory. 20% to 30% of payroll.

34 A Guide to Investing in Mexico 2019 | Labor environment

7.3 Termination of (e.g. to make or revise a union contract, to United States: accept an award by an arbitration board or to •• Permanent resident card; employment make mandatory profit-sharing payments). A •• Temporary permanent resident card expired, strike also may be called to support another plus the notice of action (I-797 Form), Unless dismissed for cause (such as dishonesty strike, provided the majority of employees indicating that the status has been extended; or excessive absenteeism), laid-off employees agree. Unions must follow specific procedures •• US immigrant visa; are entitled to an amount equivalent to three when initiating such actions. months of salary (“fixed indemnity”), plus an •• US re-entry permit (I-327 Form); amount equivalent to 20 days of salary for •• Transportation letter issued by the US every year worked. Employees with more 7.5 Employment of foreigners government; than 15 years’ service additionally receive an •• Alien documentation, identification and amount equivalent to 12 days’ salary for each According to the provisions of the MIL, at telecommunication stamp (ADIT) on the year, up to a ceiling of the equivalent of 12 least 90% of a company’s skilled and unskilled passport or on the I-94 Form; or days’ salary at twice the minimum wage at the employees must be Mexican nationals. A special •• US refugee travel document. time of dismissal, multiplied by the number of provision permits temporary employment of years. An employee who successfully sues his/ foreign technicians (up to 10%) if a company can Canada, Japan, UK, Schengen area her employer for wrongful dismissal has the prove that skilled employees are not available •• Permanent resident card. right to receive as indemnification: (i) the fixed locally. The 10% limit does not apply to indemnity; (ii) during the legal proceedings, managers, directors and other key officers, Visitor with permit to perform for up to 12 months, 100% of accrued wages who must secure special immigration permits. profitable activities (“capped variable indemnity”); and (iii) from the Operations along the border with the US are This visa is applicable for foreigners who remain 13th month and thereafter, only the equivalent exempt from the personnel requirements. of 2% monthly interest on the amounts or travel in Mexico for up to 180 days from their date of arrival, whether or not continuous. determined under (i) and (ii). Visa requirements The visa allows a foreign citizen to perform The Immigration Law and its Regulations any lawful activity and to receive any kind of Workers who are unfairly dismissed may (MIL) provide for several different types of remuneration for its performance. choose between reinstatement and immigration status and visa according to indemnification amounting to three months’ the length of the visit and the income that To obtain the visa, regardless of an individual’s severance payment. Employers may refuse to the individual may earn whilst in Mexico. nationality, the Mexican company or PE reinstate employees with less than one year Amongst the types of visa that foreigners can employing the individual must first register an of service, but must then add 20 days of pay request from the Mexican National Immigration application with the NII. This process may take for each year of service to the standard three Institution (NII) to travel to Mexico are: (i) visitor up to 20 business days. months’ severance pay or pay half the time with a permit to perform nonprofit activities; worked, if it is less than a year. (ii) visitor with a permit to perform profitable Temporary resident activities; and (iii) a temporary resident. This authorizes a foreign citizen and certain relatives to enter Mexico and remain for a 7.4 Labor-management Visitor with permit to carry out period of no longer than four years. Such nonprofitable activities relations relatives (including a spouse, children, parents, This visa is applicable for foreigners who siblings, aunts and uncles) must continue to be remain or travel in Mexico for up to 180 Nearly 40% of Mexico’s workforce is unionized; economically supported by the main temporary days from their date of arrival, whether or unions represent some 80% of industrial resident visa holder throughout the duration of not continuous. The visa allows the foreign workers in establishments with more than 20 their stay. In all cases, the first visa will be issued citizen to perform any lawful activity, employees. Most of these employees belong for one year and can then be renewed up to a provided they do not receive any income for to one of the nine national labor federations. maximum of four years, provided the conditions doing so. Foreign citizens wishing to apply Only about 20% of unionized workers belong applicable when the status was granted are for such a visa should, prior to their arrival, to single-company unions; the remainder unchanged. are members of nationwide organizations. check the list of nationalities that require a consular visa in advance. If an individual’s Federal law requires that collective bargaining As with the visa for a visitor with permit to nationality is included on the NII list and the agreements be renewed at least once every perform profitable activities, to obtain a individual holds one of the following visas, two years. Salaries must be reviewed annually. temporary resident visa, the Mexican employer they may enter Mexico without requesting a must first register an application with the NII. Strikes are legal only when employers refuse consular visa: to comply with a legal or contractual obligation

35 A Guide to Investing in Mexico 2019 | Deloitte International Tax Source

8.0 Deloitte International Tax Source

The Deloitte International Tax Source (DITS) Tax resources – Our suite of tax resources is a free online database that places up-to- includes annotated, ready-to-print versions date worldwide tax rates and other crucial of holding company and transfer pricing tax information within easy reach. matrices; a summary of controlled foreign company regimes for the DITS countries; Connect to the source and discover: an R&D incentive matrix; monthly treaty updates; and expanded coverage of VAT/ A database that allows users to view GST/Sales Tax rates. and compare tax information for 65 jurisdictions that includes – Webcasts – Live interactive webcasts and Dbriefs by Deloitte professionals •• Corporate income tax rates; provide valuable insights into important tax •• Historical corporate rates; developments affecting your business.

•• Domestic withholding tax rates; DITS is free, easy to use and readily •• In-force and pending tax treaty withholding available! rates on dividends, interest and royalties; http://www.dits.deloitte.com

•• Indirect tax rates (VAT/GST/sales tax); and

•• Information on holding company and transfer pricing regimes.

Guides and Highlights —Deloitte’s Taxation and Investment Guides analyze the investment climate, operating conditions and tax systems of most major trading jurisdictions, while the companion Highlights series concisely summarizes the tax regimes of over 130 jurisdictions.

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36 A Guide to Investing in Mexico 2019 | Contact us

9.0 Contact us

To find out how our professionals can help you in your part of the world, please visit the global office directory at http://www2.deloitte.com/global/en/get-connected/ global-office-directory.html, or select the “contact us” button at http://www.deloitte.com/tax

Mexico City Paseo de la Reforma 505 Torre Mayor Colonia Cuauhtémoc 06500 Ciudad de México

Transfer pricing partner Chinese service group Jorge Mesta Asia-Pacific Market Leadership Partner +52 55 5080 7059 [email protected]

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Mexico and China service group Manager Bing Yang +52 55 6147 2462 [email protected]

37 Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/mx/aboutus to learn more about our global network of member firms.

Deloitte provides audit & assurance, tax, consulting, and advisory to public and private clients spanning multiple industries. With a globally connected network of member firms in more than 150 countries, Deloitte brings world-class capabilities and high-quality service to clients, delivering the insights they need to address their most complex business challenges. Deloitte’s more than 286,000 professionals are committed to making an impact that matters.

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